Is a Pension Contribution Tax-Deductible?

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Pension contributions may or may not be tax-deductible depending on the type of pension.

Is a pension contribution tax-deductible for employers?

Employers can almost always tax a tax deduction for pension contributions. Pension contributions are similar to other compensation expenses.

Employers who make very large pension contributions may have limits on what they can deduct. The rules vary based on various factors including what options employees have and whether all employees in the organization receive the same pension benefits.

Can employees deduct employer pension contributions?

When your employer makes contributions to your pension, that contribution isn’t usually part of your taxable income for the year. Since the contribution isn’t part of your income, there’s nothing to deduct since you’re already not paying taxes.

The reason that you don’t usually pay taxes on employer pension contributions is that they’re considered deferred compensation. When you get the pension payments in retirement, you’ll pay taxes at that time.

The IRS almost always taxes pensions, while some states with income taxes exclude either all or part of your pension income from state taxes.

Can employees deduct employee pension contributions?

If you contribute money to your own pension, you need to know if it’s qualified or unqualified. You can deduct contributions to a qualified pension. You can’t deduct contributions to an unqualified pension.

Qualified pensions include things like 401(k)s, 403(b)s, and certain profit-sharing plans.

Most other types of private pensions, including deferred-compensation plans, are unqualified.

Unqualified pension contributions work similarly to Roth IRA contributions. You contribute post-tax dollars and don’t get an immediate tax deduction, but that portion of your pension generally isn’t subject to taxes when you retire.

Make sure you keep records of all of your unqualified contributions. While your pension plan should keep records, you don’t want to get improperly taxed in retirement and not have proof you shouldn’t be taxed.

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