At 81, my husband left his government job and the Georgia Defined Contribution Plan (GDCP) refunded his money. Is that taxable income, or do we only owe on the interest?

[s-jturb0]

The ERSGA (Employee Retirement System of Georgia) who refunded us says they can’t tell me what type of plan it is, such as a 457b or 403 b, and the IRS says I need that information to find out what part is taxable.

[Opus 17]

Unfortunately, you don’t have enough information for us to answer the question either.  To start with, we would need to know what type of plan it was, and why the contributions were refunded.  I don’t understand why the contributions would be refunded at all. That suggests to me that his membership in the retirement plan was canceled or that he was deemed ineligible. If he was a participant in the retirement plan, his contributions would have gone into the plan, and been the basis for retirement payments that would be reported on a form 1099R.  If his contributions were refunded, that suggest that, somehow, he was never part of the plan in the first place. Which strikes me as very odd, and I would need to know a lot more about the situation to understand what is being claimed.

In general, if the contributions were made from his paycheck after tax, they would not be taxable when returned. But if the contributions were made by pretax payroll deduction, or if the contributions were made by the employer, and not included as part of his taxable income, then they are taxable now. But that’s only a general statement and much more specific information is needed. 

[Critter-3]

Georgia Defined Contribution Plan Membership
Congratulations on your new employment! One of the benefits included with your employment
is membership in the Georgia Defined Contribution Plan (GDCP). Enrollment in the Defined
Contribution Plan is a mandatory condition of your employment and requires you to contribute to
the Plan through payroll deduction beginning immediately.

As a member of the Georgia Defined Contribution Plan, your contribution is equal to 7.5% of
your eligible pay. The contribution is post-tax. More information about your contributions and
the benefits provided by the Georgia Defined Contribution Plan are available in the Employee
Handbook. You can access the Handbook online at www.ers.ga.gov by choosing “Georgia
Defined Contribution Plan” under “Pension Plans” in the left hand menu, then clicking on
“Handbook” in the right hand menu.

https://www.ers.ga.gov/retiree

1099 Frequently Asked QuestionsJanuary 10, 2022

1. When will my 1099 be mailed for the year 2021?

1099s will be mailed by Monday, January 31, 2022.

2. Can I see my 1099s online?

Yes!  If you received pension payments, a lump sum refund, or are a beneficiary who was paid a death benefit during calendar year 2021, your 1099 is available online.  Use the Log In button at the top of this page to log into your account.

[dmertz · Accepted solution]

It appears that the GDCP is essentially a nonqualified deferred annuity, otherwise the interest credited monthly would have been taxable in the years credited rather than when distributed.  As an annuity, I would expect it to be reported on Form 1099-R issued by the plan.  Since the contributions are after-tax, only the interest is taxable upon distribution.

[s-jturb0]

@Opus 17 @Critter-3 @dmertz , thank you VERY much! The TurboTax question field has a low character limit.

GDCP is a required after-tax deduction from the pay of part-time state workers. It is called a "Social Security replacement plan" because the state doesn't withhold Social Security from those earnings. ERSGA (Employee Retirement System of GA) holds the funds. When you finish working there in a part-time capacity, and are over 59 1/2, you can get the money refunded without penalty. I thought that was the only option. (Later, I found that there's probably an option to have them send periodic distributions.)

I wanted to know whether the IRS would consider the refund to be taxable income, so that we could set aside whatever is needed for tax.  From what I understand, the ERSGA site at at https://www.ers.ga.gov/post/gdcp-handbook says that only the portion of it that was from interest on the contributions is taxable, but the contributions themselves are not taxable. However, I was seeking confirmation. To get that answer from the IRS site, I had to provide the type of plan. ERSGA kept saying they didn't know, and I didn't find it in their handbook. On my fourth call to ERSGA today, I finally got an answer (though hesitant) that it is considered a "qualified plan".  I'm pretty sure that confirms that since it was after-tax money, we won't have to pay income tax on it. The ERSGA site indeed has a spot where you can look for your 1099, but they won't post the upcoming one until the end of 2023. It's hard for me to understand the way these things are phrased on websites and I'd rather not have to get an appointment with a tax advisor if it isn't necessary. I'll greatly appreciate any more clarifications anyone can offer!

Thanks again.

[dmertz]

I've reviewed the Georgia Code and § 47-22-1 identifies the GDCP as a 401(a) plan, which would indeed make it a qualified retirement plan.

Although the reporting on Form 1040 of a lump-sum distribution is generally the same whether the plan is qualified or not,  being qualified rather than nonqualified means that the distribution is eligible for rollover to an IRA.  Unless your husband waived the requirement, the plan was required to have provided your husband with a statement explaining rollover options at least 30 days prior to making the distribution.  Note, however, that a portion of this distribution was your husband's 2023 RMD from this plan, so only the amount in excess of the RMD is eligible for rollover.  If rolled over, the portion rolled over is deemed to come first from the taxable part (the interest), reducing the amount that is subject to tax in 2023.  The deadline for competing the rollover is the 60th day after the day that your husband received the distribution.

[s-jturb0]

@dmertz 
Wow! Thank you for yet another very  helpful answer! ERSGA said they emailed something but if so, my husband probably mistook it for spam. I will have to ask them what portion was this year's RMD.  For the part that was from interest and is referred to as taxable, we rolled that into a traditional IRA because at that point I did not know that the contributions were after tax. In case your generosity continues, my remaining questiosn are these.

1) Will we be taxed on the part (outside of the RMD portion) that was from after-tax contributions?

2) If so, can we reduce the amount of tax we owe on the refunded non-RMD, after tax contributions by rolling that over to an IRA?

3) If so, is it best to use a Roth IRA since it is after-tax money?

[dmertz]

1)  No.  The after-tax portion not rolled over is nontaxable.

2)  The question does not apply.

3)  Yes, it would be better to roll the after-tax portion over to a Roth IRA rather than a traditional IRA.  To avoid any taxation of the distribution, the entire pre-tax portion (the earnings) would need to be rolled over, then whatever remains of the gross distribution minus the RMD could be rolled over to the Roth IRA.

For example, lets say that the gross distribution was $40,000, of which $30,000 was after-tax and $10,000 was earnings, and the RMD for 2023 is $2,000.  To avoid any portion being taxed in 2023, $10,000 (all of the earnings) would need to be rolled over to a traditional IRA.  After that, up to $28,000 could be rolled over to a Roth IRA, leaving the $2,000 RMD not rolled over.  If less than $10,000 is rolled over to the traditional IRA, whatever portion of the $10,000 is not rolled over to the traditional IRA will add to AGI in 2023.  If more than $10,000 is rolled over to the traditional IRA, the portion rolled over in excess of the $10,000 of earnings becomes basis in nondeductible traditional IRA contributions because that portion is from the after-tax funds.

One other thing:  Because the earnings were eligible for rollover (assuming that the after-tax portion exceeds the RMD), an minimum of an amount equal to 20% of the earnings was required to have been withheld for federal taxes.  Referring back to the example, coincidentally that would be $2,000 and would be sufficient to satisfy the RMD.  If the tax withholding was actually more than the RMD, your husband would have to come up with funds from another source to replace a portion of what was withheld to be able to roll over (to either a traditional or Roth IRA) the entire amount that is eligible for rollover.

[s-jturb0]

THANK YOU SO MUCH! You are a Godsend!

I think that the 20% withholding would only apply if he were under age 59 1/2. ERSGA seems to have given us the whole amount because we rolled over the part that was interest earnings. To clarify, they sent the bulk of it directly to us, but rolled over the smaller part that was interest which, if I understand it, is the only taxable part. I think that if we leave that portion that was interest in the traditional IRA for five years or something, we don't have to pay income tax on it.  But my most urgent question is whether we'll incur more taxes if we spend part of the money that ERSGA sent directly to us. It sounds like because he is over 59 1/2, we don't incur any extra taxes.

[dmertz]

"I think that the 20% withholding would only apply if he were under age 59 1/2."

That is not correct.  However, because they directly rolled the otherwise taxable earnings over to a traditional IRA, no withholding was required because direct rollovers are exempt from the general withholding requirement.  That means that all of the remainder was paid directly to your husband and the remainder, less the RMD, can be rolled over to a Roth IRA.  Once in the Roth IRA that amount can be distributed at any time without tax, but any earnings within the Roth IRA will be taxable until it has been 5 years since the beginning of the first year for which your husband made his first Roth IRA contribution (which would be January 1, 2023 if he has never had another Roth IRA).

Because the otherwise taxable portion has been rolled over to a traditional IRA, nothing you could do with the rest of the distribution would make any part the distribution taxable.

Your husband will be receiving two Forms 1099-R reporting the distributions from the plan, one with the earnings amount in box 1, zero in box 2a and code G in box 7.  The other one should have in box 1 the amount paid directly to him, zero in box 2a, the same amount in box 5 as is in box 1, and code 7 in box 7.

[s-jturb0]

Thank you so incredibly much!!! It has been so hard finding this out until you started helping. You have taken a load off of my mind! May you be blessed!