2. Tax Topics‎ > ‎Retirement Income‎ > ‎

When did the taxpayer retire?

posted Mar 1, 2011, 6:12 AM by Wayne Culp   [ updated Nov 23, 2011, 11:03 AM ]
Pre-July 1, 1986
If the person retired before July 1, 1986, then the 3-year rule was in play. Almost everyone used the 3-year rule. All their contributions were taken in the first three years. Today, all their income is taxable. If a person retired before 1987, I'd make a brief reference to the 3-year rule and then tax the whole amount. If they were not allowed to use the 3-year rule (or elected not to), they will know it. It would have been a big deal at the time. Unless they respond to a quick reference, "You were probably able to use the 3-year rule," with something like, "NO, I wasn't!!!", you can be pretty sure they took it. [Any annuitant who didn't qualify for the 3-year rule would have been at least 62 years old with less than 11 years of service (and no promotions, no step-increase and no cost of living allowance) in 1986. That would have been VERY unusual in those days.] 

July 1, 1986 to December 31, 1986
If the person retired between July 1 and December 31, 1986, they were not allowed to use the 3-year rule, but there was NO END to the annual exclusion. It goes on as long as they--or their surviving beneficiary--is alive. 

Post 1986
If they retired after this date, the exclusion goes on until they should have recovered their cost; then it goes away. All future payments are fully taxable.

Deb Fisher
TRS Idaho
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