Yes, PERA is taxable income on your federal return: monthly pension payments from a Public Employees’ Retirement Association account are treated as ordinary income by the IRS, just like wages, and you’ll receive a Form 1099-R each January reporting the amount.1Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The Colorado picture is friendlier. A state pension subtraction shields a large portion of the benefit from Colorado income tax for most retirees, and a 2026 change is set to remove the dollar cap entirely. The rules below focus on Colorado PERA, which is by far the largest of the state PERA systems, though the federal principles apply to any government defined-benefit plan.
Federal Tax on Monthly PERA Benefits
Nearly the full monthly benefit is taxable at the federal level. Your PERA contributions were excluded from federal taxable income during your working years under a “pick-up” mechanism in the tax code that treats employee contributions as if the employer made them.2Office of the Law Revision Counsel. 26 U.S.C. 414 – Definitions and Special Rules Because you never paid federal tax on that money going in, the IRS collects it when the money comes back out.
Unlike a paycheck, PERA benefits aren’t subject to Social Security or Medicare tax, since they aren’t earned income. PERA also withholds federal income tax from each check by default. You can adjust that amount by filing Form W-4P with the plan.3IRS. Form W-4P – Withholding Certificate for Periodic Pension or Annuity Payments
The Small Tax-Free Portion
A slice of each payment can be tax-free if your account holds after-tax contributions. For Colorado PERA, that generally means contributions made before July 1, 1984 under the PERA benefit structure, contributions made before January 1, 1986 under the DPS benefit structure, or any after-tax dollars used to purchase additional service credit.4Colorado PERA. Taxes and PERA Benefits
The IRS uses the Simplified Method to figure the tax-free share of each monthly check. You divide your total after-tax investment in the plan by a fixed number of expected payments based on your age when benefits start. Starting between ages 56 and 60, the divisor is 310; at 71 or older, it drops to 160.5Internal Revenue Service. Publication 575, Pension and Annuity Income Once you’ve recovered your entire after-tax investment through those monthly exclusions, every dollar of future benefit is fully taxable.
Colorado State Tax on PERA Benefits
Colorado allowed the state to tax your PERA contributions in the year you earned them, even though those same dollars were tax-deferred federally.6Department of Revenue – Taxation. Income Tax Topics: Social Security, Pensions and Annuities That history shapes the retirement side: Colorado gives retirees a pension and annuity subtraction to prevent taxing the same money twice, and it can zero out state tax on the benefit for most people.p>
Under prior law, retirees ages 55 to 64 could subtract up to $20,000 of qualifying retirement income from Colorado taxable income, and those 65 and older could subtract up to $24,000.7Cornell Law Institute. Colorado Code 39-22-104(4)(f) – Pension and Annuity Subtraction Rules For tax years beginning on or after January 1, 2026, Colorado Senate Bill 25-136 removes the age and dollar caps and lets retirees of any age subtract their full pension and annuity income. If signed into law as expected, most PERA retirees would owe no Colorado income tax on their benefits. Confirm the change with the Colorado Department of Revenue or PERA before you file.
A separate PERA/DPSRS subtraction covers contributions from the 1984–1986 window that Colorado already taxed. When both apply, Colorado directs you to claim the pension and annuity subtraction first and use the PERA/DPSRS subtraction for any remaining benefit income above the pension subtraction limit.6Department of Revenue – Taxation. Income Tax Topics: Social Security, Pensions and Annuities
Lump-Sum Refunds Are Taxed Differently
If you leave public employment before qualifying for a monthly pension and take a lump-sum refund of your accumulated contributions, the tax picture changes fast. Any lump sum paid directly to you carries 20% mandatory federal income tax withholding, regardless of what you plan to do with it later.8Internal Revenue Service. Topic No. 412, Lump-Sum Distributions If you’re under 59½, the IRS adds a 10% early withdrawal penalty on the taxable portion.9Office of the Law Revision Counsel. 26 U.S.C. 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts On a $50,000 refund, that’s $10,000 withheld and another $5,000 in penalty before the money reaches your account.
Two exceptions can drop the 10% penalty for people under 59½. If you separated from service during or after the year you turned 55, the penalty doesn’t apply. Setting up a series of substantially equal periodic payments based on life expectancy also avoids it.10Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts The 20% withholding still applies in both cases unless you use a direct rollover.
A direct rollover moves your balance straight from PERA to another qualified plan or IRA. Nothing is withheld, no early withdrawal penalty applies, and the funds keep their tax-deferred status.11Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions If you already received a check with 20% withheld, you have 60 days to complete an indirect rollover. To avoid tax on the full amount, you have to deposit the entire original distribution, including the withheld 20%, into a qualifying account and recover the withheld amount later as a tax refund. Rolling over only the net check leaves the withheld portion treated as a taxable distribution.
Disability, Survivor, and RMD Situations
Disability retirement is taxed as wages, not pension income, until you reach the minimum retirement age you would have hit without the disability. It’s reported on line 1h of Form 1040 during that period, then switches to lines 5a and 5b as pension income afterward.12Internal Revenue Service. Publication 907 (2025), Tax Highlights for Persons With Disabilities The reclassification matters for Colorado, because only pension-classified income qualifies for the state pension subtraction.
Benefits paid to a surviving spouse or other beneficiary are generally taxed on the same terms as the member’s own benefits would have been. A surviving spouse can roll a lump-sum death benefit into a traditional IRA, Roth IRA, or other qualified plan to preserve tax deferral, and monthly annuity payments qualify for Colorado’s pension subtraction the same way. Non-spouse beneficiaries who inherit a lump sum can roll it into an inherited IRA, but the SECURE Act’s 10-year rule requires the account to be emptied by the end of the tenth year after the member’s death, unless the beneficiary is an “eligible designated beneficiary” — a minor child of the member, a disabled or chronically ill person, or someone no more than 10 years younger than the member.13Internal Revenue Service. 14Internal Revenue Service. Retirement Topics – Required Minimum Distributions (RMDs) Missing an RMD carries a 25% excise tax on the shortfall, reduced to 10% if you correct it within two years.