One of the most common questions I hear with regards to KPERS—Is it taxable?
It’s a great question because when it comes to retirement, every dollar counts. Understanding how taxes affect your Kansas Public Employees Retirement System (KPERS) benefits can make a big difference in how much money stays in your pocket, and if you’re like me, you don’t want to leave good ol’ Uncle Sam a tip.
Let’s break it down in plain English.
So, grab a cup of coffee—or something stronger if that helps you power through tax talk—and let’s dig into the details of how KPERS fits into your retirement income.
What is KPERS?
If you’re reading this, you probably already know KPERS is the Kansas Public Employees Retirement System. What you might not know is how it can impact your retirement in ways you haven’t even considered—especially when it comes to taxes and planning for the long haul. Let’s cut through the noise and break it all down, so you can make the most of the benefits you’ve worked so hard to earn.
KPERS provides a steady stream of income in retirement, funded through employee and employer contributions, plus investment returns. Think of it as a thank-you note from your years of service—except instead of a note, you get monthly checks!
Is KPERS Taxable?
Here’s the scoop on how your KPERS benefits are taxed:
Federal Taxes
Uncle Sam always gets his share.
Your KPERS benefits are subject to federal income tax. KPERS will even help you out by withholding federal taxes from your monthly check, unless you tell them otherwise.
Pro tip: Make sure you adjust your withholding so you don’t end up giving the government an interest-free loan—or being surprised to owe a chunk of change at tax time.
State Taxes
Now for the good news: If you’re a Kansas resident, KPERS benefits are exempt from state income tax. That includes not just your regular monthly payments but also lump sums like PLSO and DROP (more on those in a minute). This is a major win for retirees staying in Kansas—you get to keep more of your money where it belongs: in your pocket.
But if you’re planning to retire somewhere else, be sure to check the tax rules in your new state. Some states love to roll out the red carpet for retirees, while others… well, let’s just say they see you coming (looking at you, California).
Social Security and Medicare Taxes
KPERS benefits are not subject to Social Security or Medicare taxes. These are typically deducted from your wages during your working years but don’t apply to pension income in retirement.
Are Lump-Sum Options Taxable: PLSO and DROP
Now, let’s dive into the big-ticket items: lump sums.
Depending on eligibility, KPERS offers two options, the PLSO and DROP, which allow you to take part of your retirement benefit as a one-time payout. While PLSO is an option for pretty much everyone, the DROP program is only available in certain circumstances. We won’t go in depth during this particular blog, but if you are eligible for the DROP lump-sum, you are almost certainly aware of it. These can be fantastic tools for your retirement planning, but they also come with tax implications you’ll need to account for.
Partial Lump Sum Option (PLSO)
The Partial Lump Sum Option (PLSO) is exactly what it sounds like—it lets you take anywhere from 10% to 50% of your retirement benefit upfront as a lump sum. Whether you’re using it to pay off debt, buy a vacation home, or treat yourself to something like a boat (no judgment here!), it offers a lot of flexibility. But before you take the plunge, it’s important to consider the tax implications. There’s also the option to roll over the lump sum into a tax-deferred retirement account, which could give you more control over how and when you pay taxes. More on that later!
Federal Taxes
Just like any ongoing pension payments, any money you take as part of the PLSO will be subject to federal income taxes. However, there’s a catch: If you take the lump sum in cash (instead of rolling it over), KPERS will withhold 20% for federal taxes. While this can help cover some of your tax obligations, depending on your overall income, you may still owe additional taxes when you file your return. It’s important to plan ahead to avoid any surprises when tax season rolls around.
State Taxes
If you’re living in Kansas, there’s some good news—your PLSO is exempt from state income tax. So, go ahead and celebrate—you’ve earned it!
And if you’re not living in Kansas, you’ll have to check with the state you are living in, because it varies.
Tax Deferral Option
To avoid a hefty tax bill all at once, consider rolling the PLSO into an IRA or 401(k). This allows you to defer taxes until you actually withdraw the funds from the retirement account, which can be a major advantage in managing your financial future. By deferring taxes, you can spread out the tax impact over several years, potentially lowering your overall tax burden. This option gives you more control over when and how you pay taxes, allowing you to make withdrawals on your schedule. If you’re looking to preserve more of your lump sum for future growth, this strategy could be a game-changer for your retirement planning.
Deferred Retirement Option Program (DROP)
DROP is available to certain KPERS members like police officers and firefighters. It allows you to keep working while your pension accrues in a separate account. When the DROP period ends, you get a lump sum equal to the accrued benefits and interest.
Federal Taxes
Just like the PLSO, any DROP distribution will be subject to federal income taxes. If you opt to take the lump sum in cash, KPERS will withhold 20% for federal taxes. Be mindful, however, that depending on your overall income, you may owe more when filing your taxes, so again… plan accordingly.
State Taxes
You guessed it! DROP payments are exempt from Kansas state income tax. This means you don’t need to worry about paying state taxes on the lump sum you receive at the end of the DROP period, which should be music to your ears!
And yet again, if you’re living in another state, check with that state.
Tax Deferral Option
As with the PLSO, rolling your DROP distribution into a qualified retirement account, such as an IRA or 401(k), can be a smart move to defer taxes. This allows you to spread out the tax impact over time and gives you greater control over when and how you access your funds. By deferring taxes until you begin making withdrawals, you can better manage your retirement income and potentially reduce your overall tax burden in the process.
Pro Tip: Establish a separate IRA for any PLSO or DROP retirement rollovers. Not only is the rollover not subject to state income taxes, but any subsequent growth of these funds is also not subject to Kansas state income taxes. Having a separate account will allow you to easily track and report this when it comes to tax time.
Coordinating KPERS with Other Retirement Income
KPERS is just one piece of the retirement income puzzle. To make it all fit together, you’ll want to think about how it complements other income sources like Social Security, retirement accounts, and any additional earned income (whether from your spouse or from an encore career).
Social Security
Social Security pairs well with KPERS, but keep in mind that up to 85% of your benefits can be taxable depending on your total income. Timing is everything—delaying Social Security could increase your monthly payout, but you’ll need other income to bridge the gap in the meantime.
Retirement Accounts
Withdrawals from traditional IRAs or 401(k)s are taxed as ordinary income, just like KPERS. If you’re not careful, taking too much at once could bump you into a higher tax bracket. Balancing these withdrawals with your KPERS income is key.
Other Pensions or Spousal Income
If your spouse is still working or has their own pension, you’ve got even more moving parts to consider. Combining income sources can lead to a bigger tax bill, but it also gives you flexibility. For example, you might use one income to cover essentials while letting another grow.
A Few Practical Strategies from an Expert
- Delay Social Security if You Can: Each year (even each month) you wait increases your monthly payout.
- Use Roth Accounts Wisely: Tax-free withdrawals can help balance out taxable income like KPERS.
- Plan Around RMDs: Required Minimum Distributions start at age 73—make sure you’re ready. Don’t wait until you are 73 to have a plan.
- Revisit Withholding Annually: Adjust your federal withholding as your financial situation changes.
- Don’t Forget Tax-Advantaged Accounts: Rolling lump sums into an IRA can save you money long-term. Additionally, if you or your spouse still have earned income, you are likely eligible to make contributions to both Roth and Traditional IRAs.
Piecing Together the KPERS Tax Puzzle
Well, you made it through all the tax talk! Is your coffee cold because it was so exciting? No, just me, then?
Understanding how KPERS fits into your retirement strategy doesn’t have to be a puzzle—just a few smart moves can help you minimize taxes, maximize income, and enjoy the retirement you’ve worked so hard for.
If you’re feeling a little unsure about how to piece it all together, having someone who really knows the ins and outs of KPERS on your side can make all the difference. If you or someone you know could use a little guidance, don’t hesitate to reach out. We’d be happy to help you assemble your puzzle.
This post is for education and entertainment purposes only. Nothing should be construed as investment, tax, or legal advice.