Pensions, Annuities, and other Retirement Arrangements

In general, income is subject to Massachusetts income tax withholding if it is taxable under Massachusetts personal income tax law and it constitutes wages for federal withholding purposes. With certain statutory exceptions, withholding is required only if both conditions apply. The tax advantage conferred upon many retirement plans is that income recognition of contributions and plan earnings is deferred to the time distributions are made from the plan. Generally, retirement plan funds are taxed once, either at the time of contribution or the time of distribution. If the Massachusetts tax treatment of contributions differs from the federal treatment, the Massachusetts tax treatment of distributions will differ correspondingly.

(a) Contributions . 1. Federal Definition of Wages . The federal definition of wages, adopted by Massachusetts under M.G.L. c. 62B, § 1, excludes contributions to certain qualified pension, profit sharing, annuity, cash or deferred arrangements, and stock bonus plans. See Code § 3401(a)(12) and the regulations thereunder for guidance on specific exclusions. Generally, amounts included in federal wages for withholding purposes are also included in Massachusetts wages, although certain types of retirement contributions are not taxed in Massachusetts, regardless of the federal treatment. See 830 CMR 62B.2.1(10)(a)2. Generally, Massachusetts withholding is not required on employer contributions to plans excluded from the federal definition of wages, although certain types of retirement contributions are statutorily included in wages for Massachusetts withholding purposes even though they may be excluded for federal purposes. See 830 CMR 62B.2.1(10)(a)3. 2. Contribution Amounts not Subject to Tax in Massachusetts . Withholding is not required on contributions to the following pension or retirement plans, regardless of whether such contributions are included in the federal definition of wages. a. Wage or salary deductions contributed to the Savings Banks Employees Retirement Associations under M.G.L. c. 168, §§ 39 through 41. b. Wage or salary deductions contributed to the Co-operative Banks Employees Retirement Association under M.G.L. c. 170, §§ 30 through 32. c. Wage or salary deductions contributed to the Credit Union Employees Retirement Association under M.G.L. c. 171, §§ 31 through 33. 3. Contribution Amounts Included in the Massachusetts Definition of Wages but not Included in the Federal Definition of Wages . Withholding is required on contributions made on behalf of a public employee to a state or municipal retirement system established under M.G.L. c. 32, §§ 1 through 28 (including contributions to a teachers' retirement fund established under M.G.L. c. 15A, § 40), and to the Massachusetts judges’ retirement fund under M.G.L. c. 32, § 65D for a judge appointed on or after January 2, 1975. (b) Distributions . Generally, distributions under employer deferred compensation plans and Individual Retirement Accounts are included in taxable income and are subject to Massachusetts withholding if they are subject to federal withholding. There is no withholding, however, on any part of a distribution that is not expected to be includible in the recipient's taxable income. Any portion of a distribution that the recipient could exclude from income because it represents either the employee’s nondeductible contributions to the plan or the annuitant’s investment in the contract is not subject to withholding. The amount of the distribution that is taxable in Massachusetts will differ from the federal taxable amount if the Massachusetts treatment of contributions differs from federal treatment. 1. Periodic and Nonperiodic Distributions under Code § 3405(a) and (b) and Subject to Federal Withholding . If an individual elects federal withholding on distributions from pensions, annuities, and certain other deferred income, as provided under Code § 3405(a)(2) and (b)(2), Massachusetts withholding is required except on the portion of the distribution that represents previously taxed contributions. 2. Contributory and Military Government Pensions; Social Security . Although distributions from contributory annuity, pension, endowment or retirement funds of the United States government or the commonwealth or any political subdivision to which the employee has contributed, or any income received from the United States government as retirement pay for a retired member of the Uniformed Services of the United States, are subject to elective federal withholding, such distributions are not subject to Massachusetts withholding. Similarly, social security benefits, which are subject to voluntary federal withholding, are not subject to Massachusetts withholding. Income from federal or Massachusetts state or local government contributory or military pensions, or social security, is not taxed in Massachusetts. Massachusetts state court judges appointed on or after January 2, 1975 are participants in the contributory retirement system and their pension distributions are nontaxable. State court judges appointed before January 2, 1975 receive taxable noncontributory pensions. All or part of the pension income of certain retirees from Massachusetts state or local government service who began Massachusetts state service prior to July 1, 1939, who retired under M.G.L. c. 32, §§ 56 through 60, and who are also veterans, may be subject to tax. 3. Rollovers . A distribution constituting a federally tax-free rollover from a qualified pension, profit-sharing, stock bonus, or annuity plan, or otherwise accorded tax-free federal rollover treatment, to an eligible retirement plan, will require no withholding for Massachusetts purposes if no withholding is required for federal purposes. If assets are transferred, or “rolled over” as a tax-free transfer of money or property from one plan into another, no income will be realized at the time of the transaction for Massachusetts income tax purposes if no income is realized for federal income tax purposes. If federal withholding is required on the taxable part of an eligible rollover distribution that is not rolled over directly to another eligible plan, it is also required in Massachusetts unless such eligible rollover distributions would never be subject to Massachusetts personal income taxation independent of the facts and circumstances of a taxpayer’s particular tax situation. The term “eligible rollover distribution” shall have the same meaning as under Code section 3405(c). Any withholding that is required under this subsection is subject to annual reporting and the payment schedule described in 830 CMR 62B.2.1(6)(a)2. The amount subject to withholding in Massachusetts is the entire distribution, less any previously taxed contribution. 4. Roth Individual Retirement Accounts (IRAs) and Education Savings Accounts . Distributions from Roth IRAs (Code § 408(a)) and Education Savings Accounts (Code § 530) are included in Massachusetts income and Massachusetts withholding will follow federal withholding treatment. Massachusetts follows federal rollover rules for conversions from a traditional IRA to a Roth IRA. 5. Guaranteed Payments by Partnership to Retiring Partner . Withholding for Massachusetts on payments characterized as guaranteed payments under Code § 736 will follow federal withholding treatment. Generally, such payments are taxable to the retiring partner but are not subject to withholding. 6. Retirement Income of Non-residents . Generally, non-residents’ retirement income, as defined in 4 U.S.C. § 114, is not subject to Massachusetts withholding. Massachusetts source retirement income not covered under 4 U.S.C. § 114 is subject to withholding in Massachusetts. 7. Retirement Income to a Massachusetts Resident from another State or a Political Subdivision of another State . Withholding is not required on income to a Massachusetts resident from a contributory annuity, pension, endowment or retirement fund of any other state or political subdivision of another state, if income from a similar Massachusetts fund would not be taxed in that state or political subdivision.