What's taxable
Most of your benefit is taxable. Your benefit is made up of an annuity (from your own contributions) and a pension (paid by the System). If you made after-tax contributions before July 1, 1992, or bought service with after-tax money, an exclusion ratio keeps that amount from being taxed again. Federal tax is withheld unless you file a waiver of withholding. Each January you get a Form 1099-R; the payment dated December 31 counts in that year even if it arrives in January. The Retirement Office cannot help prepare tax returns. Group C #2 handout, p. 2, Tax on Retirement Benefits; Group C #1 handout, p. 2
While you work, your contributions are "picked up" by your employer, so they are treated as employer money for tax purposes. 16 V.S.A. § 1944(h) (picked-up member contributions are treated as employer contributions for tax purposes)
Reading your 1099-R
On the 1099-R, box 1 is the gross pension paid in the year and box 2a the taxable amount; if 2a is smaller, you paid tax on some contributions while working, and those are not taxed again. Box 5 is the part that is not taxable (blank means fully taxable; it is not insurance premiums). Box 4 is federal tax withheld and box 12 is Vermont state tax withheld (blank if you chose no withholding or your filing status gives none). 1099-Rs are mailed by Jan. 31 and are also online at retire.vermont.gov. Winter 2021 newsletter, p. 2, Make Sense of Your 1099-R Form
Vermont income tax
VSTRS says most of your benefit is taxable, and it can withhold Vermont state tax. No source we have says how Vermont taxes it, or whether any Vermont exemption applies.
We say only what VSTRS says. Ask the Vermont Department of Taxes or a tax adviser about Vermont tax.
Group C #2 handout, p. 2; Winter 2021 newsletter, p. 2; 16 V.S.A. § 1946Taxes: the handouts say most of the benefit is taxable, with an exclusion only for after-tax contributions, and the 2021 newsletter shows Vermont state tax withheld on the 1099-R. The statute (16 V.S.A. § 1946) says VSTRS allowances are 'exempt from taxation, including income tax'. Handout followed; the site does not say the benefit is tax-exempt.
Group C #2 handout, p. 2; Winter 2021 newsletter, p. 2; 16 V.S.A. § 1946What the sources say
- Most of your VSTRS benefit is taxable. If you made after-tax contributions before July 1, 1992, or bought service with after-tax money, part of each payment is excluded from tax (the 'exclusion ratio').Group C #2 handout, p. 2, Tax on Retirement Benefits
- VSTRS withholds federal tax unless you file a waiver. You get a Form 1099-R each January; the payment dated December 31 counts in that year even if it arrives in January.Group C #2 handout, p. 2
- On your 1099-R, box 4 is federal tax withheld and box 12 is Vermont state tax withheld. Box 5 is the part that is not taxable; if it is blank, your pension is fully taxable.Winter 2021 newsletter, p. 2
- Check with VSTRSVSTRS can't help with tax returns. How Vermont taxes your benefit is not in our sources, and Vermont law (16 V.S.A. § 1946) has older wording about an exemption. Ask the Vermont Department of Taxes or a tax adviser.Group C #2 handout, p. 2; 16 V.S.A. § 1946No Vermont tax-department source; the statute's exemption wording conflicts with the handout.
The taxable amount is your monthly check from the benefit formula, adjusted each year by the COLA. For the Level Income Option, see VSTRS and Social Security; for refunds, see leaving teaching.
Questions
Is my VSTRS pension taxable?
Mostly, yes. VSTRS says most of your benefit will be taxable. Only the part that returns contributions you already paid tax on (after-tax contributions before July 1, 1992, or an after-tax service purchase) is excluded.
Does VSTRS withhold Vermont tax?
It can. Your 1099-R shows Vermont state tax withheld in box 12. How Vermont taxes your benefit isn't in our sources; ask the Vermont Department of Taxes or a tax adviser.
Source: VSTRS Eligibility for Retirement: Group C #2 handout (Office of the State Treasurer), undated (PDF of Sept. 21, 2012), with 16 V.S.A. chapter 55 as of the 2026 session, p. 2; Group C #1 handout p. 2; Winter 2021 newsletter p. 2; 16 V.S.A. §§ 1944, 1946. Last reviewed .