Q. Would you kindly explain the difference between total annuity paid out versus contributions paid out?
A. Once upon a time, retiree annuity payments consisted of a return of the contributions an employee made to the retirement system while working. Since taxes had already been paid on that money, the annuity was tax free. When those contributions were exhausted, annuity payments were made with the government’s money, 100 percent of which was taxable.
A few years back, the law was changed so that a portion of each annuity payment became taxable. However, the law didn’t change the way annuities are paid. Just as has been true all along, annuity payments are first made with the money an employee contributed to the retirement system. Only then does the retiree receive the government’s money. This accounting trick only shows up when a retiree dies within a few years after going on the annuity roll. The survivor adds up the untaxed payments received and concludes that there must be some untaxed money left over that could be paid out in a lump sum. There seldom is. That’s because for most retirees their contributions to the retirement system are exhausted within 1 1/2 to 2 years.
