Pensions, Retirement Plans and Annuities
California generally conforms to Federal treatment of pensions. However, foreign equivalents to Social Security are generally taxable to CA. See Chapter 2.3. Also see “Individual Retirement Accounts” in this chapter.
Taxation of Out-of-State Pensions
P.L. 104-95 prevents states from taxing the pensions of former residents of any state received after December 31, 1995 (R&TC 17952.5). Benefits received from the following plans are not subject to out-of-state taxation:
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IRC Sec. 401(a) trusts exempt from taxation under IRC Sec. 501(a)
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IRC Sec. 403(a) annuity plans
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IRC Sec. 403(b) annuity contracts
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IRC Sec. 408(k) plans
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IRC Sec. 414(d) government plans
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IRC Sec. 457 deferred compensation plans
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IRC Sec. 501(c)(18) trusts
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IRC Sec. 7701(a)(37) individual retirement plans
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IRC Sec. 401(k) plans)
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IRC Sec. 3121(v)(2)(C) plans (Nonqualified Deferred Compensation Plans) - if payments are made at least annually and spread over the actuarial life expectancy of the beneficiaries or if they are spread over at least a 10-year period; and
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Plans that are trusts under IRC Sec. 401(a) but exceed limits laid down in IRC Sec. 401(a)(17) and IRC Sec. 415.
“ Example – CA source pension while a non-resident - Tom was a CA resident from 7/1/08– 8/1/22, when he moved to Texas. He receives a pension of $1,000 per month from his former CA employer. The pension cannot be taxed by CA while he is a non-resident of CA.Example – Other state source pension while a CA resident - Harriett retired and moved to California from Ohio, where she’d lived and worked for 20 years. She became a California resident as of 8/1/22. Harriett receives a monthly payment from the defined benefit plan of her former employer. The payments received after she became a California resident are taxable only to California and not to Ohio. The payments she received before moving to California are reportable only to Ohio and are not taxable by California. ”
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Taxation of Canadian RRSPs and RRIFs
These Canadian retirement plans do not qualify as IRAs under either federal or California law. California does not recognize the U.S.-Canada treaty provision allowing an election to defer taxation of the earnings of these plans until distributions are received. Thus, the interest, dividends or capital gains earned by these plans annually are taxed by California and are an adjustment on Schedule CA. The amount taxed becomes the taxpayer’s basis in the plan for CA purposes and will not be taxed again when distributions are received. (See Chapter 4.1)