Pension Funds and Taxes

A pension fund is a pool of assets-usually from employees and an employer or employers. It is a legal entity which is created solely for the purpose of financing the pension requirements of the employees who are contributing to the fund. Pension funds allow contributors to accumulate money tax free for a certain period of time. The taxes on income contributed to a pension fund are deferred. This means that the contributors are responsible for paying taxes on the money when it is taken out of the pension fund.

The pension fund operates by collecting money on a regular basis, mainly through salary deductions, from persons who are enrolled in the fund, then investing those monies in securities, real estate and other kinds of assets, in such a way that principal is preserved while sufficient interest is generated to meet the requirements of paying benefits to retired persons who are to benefit by spending on technology, health, food imports and other  necessities from the fund.

Some of the better known and well established pension funds in the world are the Norway Government Pension Fund, in Oslo, the Stichting Pensioenfunds ABP, in the Netherlands, the Government Pension Investment Fund in Tokyo and the California Public Employees System, in Sacramento.


Pension Funds and Taxes

Pension Funds and Taxes


Pension funds can be private or public, open or closed. Pension funds described as private in the United States, are those which have filed IRS form 5500 with the Internal Revenue Service, in accordance with Title 1 of the Employee Retirement Security Act of 1974. The private pension funds sector does not include individual retirement accounts (IRAs).

Pension funds, trust funds, endowment funds and are some of the groups which are included in the low tax bracket. The low tax bracket includes all income that is not automatically subject to federal income tax.

The U.S. Treasury’s largest tax subsidy is pension contributions. Most countries allow tax free pension contributions up to a certain threshold. For example, the UK allowed writers and other professionals tax free pension contributions up to a maximum of 245,000 pounds.

This generous tax break meant that the government had to draft numerous tax avoidance rules to thwart the efforts of persons who would want to divert home income into their pensions for spending on technology, health, food imports and other  necessities from the fund. In Canada, the Yearly Maximum Pensionable Earnings defines the maximum amount on which contributions to the Canada Pension Plan are based. In Canada pension funds that are locked in to a LIRA are also afforded protection from creditors.

In the United States there are several states which do not tax federal pensions. Residents of Pennsylvania, Mississippi, Louisiana, Michigan, Massachusetts, Kansas, Hawaii, New York and Alabama generally do not have to pay states or federal taxes on pension income in these states. Taxpayers in Nebraska, California, Rhode Island, Connecticut and Vermont have to pay state and federal taxes on pension income.

Share with your friends
To report this post you need to login first.

Leave a Reply

Your email address will not be published. Required fields are marked *