Chapter 6: Contributions
Overview
Nontaxed Contributions and Members
Deferring taxes on member contributions affects a member in several ways:
- A member's take home pay may be increased by the amount of tax that would have been withheld on his or her contributions.
- A member's gross pay is reduced for federal income tax purposes only. The gross pay for Social Security, retirement compensation reporting, retirement benefit calculations and all other purposes will be the full gross pay including the retirement contributions.
Example:
| a. Gross pay/reportable compensation |
$2000.00 |
| Multiplied by member rate |
x .06 |
| = Member Contribution |
$ 120.00 |
| |
|
| b. Gross pay/reportable compensation |
$2000.00 |
| Minus member contribution |
-120.00 |
| = Member's gross federal taxable income |
$1880.00 |
| |
|
| c. Gross pay for all purposes other than federal income tax |
$2000.00 |
| |
|
- For each member, DRS maintains a record of contribution amounts on which taxes have been paid and amounts on which taxes have not been paid. This information is reported to the IRS when the member separates from service and withdraws contributions, or when the member retires.
Since income tax is deferred, the contributions are subject to taxation in the year in which the member receives them from the retirement system. This affects members requesting a refund and retiring members differently. (See publications Withdrawal of Retirement Contributions for Plan 1 or Plan 2. For Plan 3 see Request for Payment of Defined Contribution Funds.)
