Are PERA Benefits Taxable?

For first responders who’ve spent their careers putting others first and tackling challenges head-on, navigating the complexities of retirement benefits should be straightforward, not another hurdle to overcome.

If you qualify for Public Employees Retirement Association (PERA) benefits, you may be wondering: is PERA taxable? Understanding how your benefits are taxed is crucial to planning your well-deserved financial future.

At Meshbesher & Spence, we deeply respect the courage and sacrifices first responders make daily. For more than 60 years, we’ve been committed to honoring their service by guiding them through the often complicated process of PERA claims. 

In this blog, we’ll break down how taxing PERA benefits works clearly because you deserve peace after so many years of hard work. If you have additional questions about PERA or need help securing your benefits, get in touch with Meshbesher & Spence online or by calling (612) 339-9121.

What Is PERA?

The Public Employees Retirement Association (PERA) is a retirement system that provides lifelong benefits to Minnesota’s public employees. It offers benefits that support members through retirement or career-ending disabilities. 

PERA is available for various public employees, including, but not limited to: 

• Firefighters
• Police Officers
• HCMC Paramedics
• Corrections Officers
• Nurses
• Social Workers

PERA benefits are funded by contributions from employees, employers, and investment earnings. These funds are carefully managed to ensure members receive monthly payments they can rely on, whether they’re retiring after years of service or facing unexpected circumstances like a disabling injury.

Is PERA Taxable? 

PERA benefits are considered income, meaning they are subject to both state and federal taxes. However, you have several options for how taxes are withheld. When you start receiving benefits, you’ll be asked to decide how taxes are handled.

Below are the following options you can choose from: 

• Have no federal or state taxes withheld: You can choose not to have any taxes withheld. Just remember, this means you might need to make estimated tax payments quarterly.
• Allow PERA to calculate your withholdings: PERA can estimate and withhold taxes based on your marital status and exemptions. If PERA determines no tax is due, then no amount will be withheld. 
• Set a custom withholding amount: Additionally, if you want a specific amount withheld, you can request adjusted withholdings to suit your situation. However, the amount you choose to withhold must be equal to or greater than your standard withholding based on your marital status and exemptions. 

Is PERA Disability Taxable? 

Yes, PERA disability benefits are generally taxable, but it depends on your specific situation, such as your age and the type of disability benefits you receive. These benefits are subject to both state and federal taxes, and PERA will send you a 1099-R at the end of January annually. 

Suppose you’re receiving disability benefits before reaching retirement age. In that case, you will typically report these payments with a specific code so the IRS knows your benefits are considered taxable as disability income.

Once you reach your normal retirement age, 65 for most plans or 55 for the Police & Fire plan, you will receive a 1099-R with distribution codes to reflect the change to retirement benefits.

In some states, members of the Police & Fire plan with certain “in-the-line of duty” disability benefits may have unique tax rules. For example, some duty-related disabilities, like “total and permanent” ones, can remain classified as disability income for life. 

Trying to unravel the question of are PERA benefits taxable can be overwhelming. Taxes are stressful enough on their own, and unexpected surprises can make things even harder.

At Meshbesher & Spence, we are here to help you get clarity and make the process as easy as possible when it comes to your PERA benefits. Don’t let the stress of PERA benefits and taxes weigh on your mind. Reach out to us today online or call (612) 339-9121.

Is PERA Retirement Taxable?

Similar to PERA disability benefits, most of your PERA retirement benefits are taxable. In fact, retirees usually find that 97% to 100% of their pension payments are considered taxable income.

This is because contributions to PERA have been federally tax-deferred since 1983, meaning you did not pay taxes on them when they were deducted from your paycheck.
When you start receiving PERA benefits, any contributions you made before 1983 (on which you already paid taxes) are returned to you over time as part of your pension payments. The Tax Reform Act of 1986 ensures that these pre-taxed contributions are returned to you and recovered over several years.

What Is the Simplified Method?

The IRS uses something called the Simplified Method to determine what part of your retirement benefit is taxable. The Simplified Method spreads the tax-free portion of your pension over a number of years. 

The number of payments depends on the age at which you begin receiving a pension and your choice of a Single-life or Survivor Option pension. Additionally, the non-taxable amount of each monthly payment will stay the same, even if your benefit amount increases or decreases.

Once you’ve recovered all of your pre-taxed contributions, your entire pension becomes taxable. It’s important to note that only pensions that started after 1996 use the Simplified Method. Therefore, if you began receiving benefits after that year, this automatically applies to you.

Meshbesher & Spence: Making PERA Benefits Easier 

The attorneys at Meshbesher & Spence have successfully handled hundreds of PERA claims. We have experience supporting first responders and other members through every step of the PERA process, from the initial filing to resolving complex appeals when necessary. 

Taxes, especially concerning PERA disability and retirement benefits, can be confusing. That’s why our legal team is here to reduce your stress and help you make informed decisions about your financial future. 

If you’re having trouble with your PERA benefits, get in touch with Meshbesher & Spence online or by calling (612) 339-9121.