Pensions provide income to you when you retire. This income might represent a large part of your total retirement income. Regardless of how much this actually provides for your retirement, taxes are a part of taking distributions. Unless the pension is specifically excluded from taxation, you must file taxes on any money you receive from your pension.
Private pensions are not exempt from taxation. A private pension plan is a pension which is received from a private company not affiliated with a government. The private pension plan is subject to federal income tax. However, a private pension may not be subject to state income taxes. This largely depends on the state where you live, however. Some states exempt pension and other retirement income. You must still file the receipt of $10,000 from your pension. However, you may take a tax deduction for the full amount received. On both the state and federal level, your contributions to the plan are not taxable.
Government pensions are also not exempt from taxation. Like private plans, your contributions to the plan are not taxable. Interest on any contribution amounts are taxable, however, as well as any contributions by your employer. States may also exempt government pensions from state income tax though you may still need to file with your state. You must file with the Internal Revenue Service if you receive $10,000 from your pension at the federal level.
Failing to file your tax returns opens you up to harsh penalties at the federal level. You may end up with penalties and interest due on the unpaid tax associated with your distribution. The only exception to this is if the amount you receive is money you personally contributed to the plan. Still, you must file your taxes and record this money as being money you received from the plan.
If you want to avoid ongoing taxation of your pension income, you should consider converting your $10,000 to a Roth Individual Retirement Account. Roth accounts eliminate future taxation of retirement benefits. You pay income tax on the conversion amount. However, all future investment earnings are income tax-free. You must hold the Roth IRA for at least five years, and be at least 59 1/2 years old to receive tax-free distributions from the Roth IRA.
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- IRS: Publication 575
- U.S. Office Of Personnel Management: Former Employees
- Retirement Living Information Center: Taxes by State
- IRS: Pensions and Annuities