Is an SDRS pension taxed?
Not by South Dakota. SDCL 3-12C-216 exempts SDRS benefits, refunds and accrued rights from any state, county, municipal or other local tax. The federal government does tax it: your contributions were made before federal income tax, so your monthly SDRS benefit is taxable income when it's paid.
- Your contributions are made before federal income tax and your monthly benefits are taxable when paid. State law exempts SDRS benefits from any state, county or local tax.Foundation Handbook (July 2024), p. 7; SDCL 3-12C-216
South Dakota
SDRS benefits, refunds and accrued rights are exempt from any state, county, municipal or other local tax. SDCL 3-12C-216
Federal
Contributions are pre-tax; monthly benefits are taxable when paid. Foundation Handbook (July 2024), p. 7 You pay 6% of your salary into SDRS and your employer pays 6%; your share comes out of your pay before federal income tax. Foundation Handbook (July 2024), p. 7, Contributions & Interest Earnings; Generational Handbook (July 2024), p. 7; SDCL 3-12C-401(1)
Refunds, rollovers and SDRS savings plans
- If you take a refund of your accumulated contributions when you leave, SDRS can pay it to you directly or, if you choose, roll it over to one eligible plan: a 401, 403(b), IRA (408 or 408A) or 457(b) plan. A surviving spouse's lump sum can be rolled over the same way.SDCL 3-12C-603
- The same law that exempts SDRS benefits from state and local tax also protects them from garnishment, attachment and bankruptcy, and makes them unassignable, except as the law requires, such as under a qualified domestic relations order.SDCL 3-12C-216
- The SDRS Supplemental Retirement Plan (SDRS-SRP), a 457(b) plan open to employees of SDRS employers, takes pre-tax contributions that grow tax-deferred until withdrawn. Where the employer offers it, a Roth 457 option takes after-tax contributions, and qualified Roth distributions are free of federal income tax.Foundation Handbook (July 2024), p. 18, SDRS Supplemental Retirement Plan
- Termination pay (such as unused leave) paid into the SDRS Special Pay Plan isn't subject to federal income tax until it is distributed. The plan is for employees 55 or older with termination pay of $600 or more whose employer takes part.Foundation Handbook (July 2024), p. 19, SDRS Special Pay Plan
Whether a refund is worth taking at all is covered in leaving teaching.
What the sources don't cover
The SDRS sources don't cover federal withholding choices, how a refund is taxed if you don't roll it over, or taxes in another state if you move. Ask a tax adviser. Check with SDRS
That's all the SDRS sources say about taxes, so this page stays short. For the size of the check being taxed, see the SDRS formula; for how Social Security fits in, see SDRS and Social Security.
Questions
Is my SDRS pension taxed by South Dakota?
No. State law exempts SDRS benefits, refunds and accrued rights from any state, county, municipal or other local tax.
Is my SDRS pension taxed federally?
Yes. Your contributions went in before federal income tax, so your monthly benefits are taxable when paid.
Can I roll over an SDRS refund?
Yes. If you withdraw your accumulated contributions, SDRS can roll them directly into one eligible plan, such as an IRA, 403(b) or 457(b).
Source: SDRS Class A Handbooks (Foundation and Generational members), July 2024, Foundation pp. 7, 18-19; Generational p. 7. Also: SDCL §§ 3-12C-216, 3-12C-401, 3-12C-603. Last reviewed .