Various components of RRA annuities are taxed differently. With the exception of certain Social Security Equivalent Benefit (SSEB) payments covering prior years, annuity payments are taxed in the year in which they are received by the payee, regardless of the year for which they were paid. Below is an assessment of how specific annuity components are taxed.
- SSEB Payments
The SSEB portion of tier I is equivalent to the amount the Social Security Administration (SSA) would pay a railroad annuitant if railroad service were covered under the Social Security Act.
Special guaranty formula payments are considered SSEB amounts. These payments consider all eligible family members, and increase railroad retirement annuity payments to equal what SSA would pay the family group if railroad service were covered under the Social Security Act.
The SSEB amounts are treated as social security benefits for Federal income tax purposes. To determine if these benefits are taxable, refer to completion instructions for the tax return applicable to the payee. For more detailed information, refer to Internal Revenue Service (IRS) Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
- Contributory Pension Payments
Two pension components are referred to as contributory pension payments because the employee contributes to these payments through payroll taxes.
- Non-Social Security Equivalent Benefit (NSSEB) Payments
The NSSEB portion of tier I is the amount that exceeds the SSEB portion of tier I. The NSSEB is treated like a contributory pension for Federal income tax purposes, and is also referred to as a "contributory amount" paid.
- Tier II Payments
Tier II payments are based solely on the retired employee's railroad service. Like NSSEB, tier II is treated like a contributory pension for Federal income tax purposes, and is also referred to as a "contributory amount" paid.
For more information on how NSSEB and tier II contributory amounts paid are taxed, refer to IRS Publication 575, Pension and Annuity Income, and/or IRS Publication 939, General Rule for Pensions and Annuities.
- Non-Contributory Pension Payments
Two pension components are referred to as non-contributory pension payments because the employee does not contribute to them
- Vested Dual Benefit (VDB) Payments
The VDB is a regular annuity component and is fully taxable for federal income tax purposes.
- Supplemental Annuity Payments
The supplemental annuity is an annuity separate from the regular annuity payable to railroad retirement employees who meet certain eligibility requirements. It is fully taxable.
- Special Situations
- Disability Annuities
The tier I portion of a disability annuity is taxed as SSEB if a period of disability has been established and a five full month waiting period after that date has been met. This is true regardless of the disability annuitant's age.
- If a period of disability is granted in any year after the annuity beginning date, tier I is mostly SSEB, but a small portion is NSSEB. The SSEB/NSSEB split in tier I occurs because SSA would not establish a date of entitlement prior to the period of disability and five full month waiting period.
- Disability annuitants who are not granted periods of disability are paid tier I amounts taxed as NSSEB if they are under retirement age, and are paid tier I amounts taxed as SSEB or a SSEB/NSSEB split once they reach retirement age.
- Spouses and Widow(er)s with a Minor Child in Care
The tier I portion of railroad retirement annuities paid to spouses under age 62 or widow(er)s under age 60 who have a child under age 16 in his or her care, is considered all SSEB for Federal income tax purposes. SSA pays comparable benefits to spouses and widow(er)s. When the child turns age 16, the RRB continues to pay the spouse or widow(er) until the child turns age 18, whether the child is disabled or not. If the child is disabled, the spouse or widow(er) continues to receive SSEB tier I amounts, because SSA pays comparable benefits to spouses or widow(er)s.