With Southern California Edison’s 2027 pension rates announced this past week, we are beginning to hear more questions from employees who are considering retirement in the next several months or over the coming year. Inevitably, taxes become an important part of those conversations.

 

Retirement changes where your income comes from, but it does not necessarily mean taxes disappear. For California residents, income may come from an SCE pension, 401(k) or IRA withdrawals, Social Security, investment accounts, or other sources, and each can receive different federal and California tax treatment.

 

California generally taxes pension, annuity, and traditional retirement account income in a manner similar to federal law. One significant exception is Social Security: California does not tax Social Security benefits, even though some benefits may be taxable at the federal level.

 

For SCE employees approaching retirement, the important question is not simply, “How much tax will I pay?” It is, “How can I coordinate my retirement income so that taxes are considered alongside my pension, Social Security, investments, healthcare, and long-term goals?”

 

Retirement Changes Your Tax Picture

 

During your working years, much of your taxable income may come from your paycheck. Retirement creates a different picture.

 

Depending on your circumstances, retirement income may include:

 

• SCE pension income, if eligible
• Edison 401(k) distributions
• Traditional IRA withdrawals
• Roth account distributions
• Social Security
• Interest and dividends
• Capital gains
• Real estate or other income

 

The tax characteristics of these income sources can differ considerably.

 

Traditional pension and retirement plan distributions are generally included in taxable income unless part of the distribution represents previously taxed contributions or another exception applies. Qualified Roth distributions may receive different treatment.

 

That makes tax planning an important part of retirement income planning rather than something that should be addressed only when the tax return is prepared.

 

Key Question

Do you know how each of your expected retirement income sources will be taxed once your SCE paycheck stops?

 

How Is an SCE Pension Taxed in California?

 

For eligible SCE employees who elect monthly pension income, pension payments will generally be subject to federal income tax and, for a California resident, California income tax to the extent the payments are taxable.

The IRS notes that pension or annuity payments may be fully taxable when the participant has no after-tax basis in the plan. If an individual has after-tax contributions or other basis, a portion may be excluded from taxable income depending on the applicable rules.

 

California generally follows federal treatment of pension and annuity income, although differences can occur in certain circumstances.

 

This is important when comparing a pension election with the rest of your financial plan. The monthly amount shown on a pension estimate is not necessarily the amount available to spend after federal and state taxes.

 

Rather than focusing only on the gross pension benefit, retirees may benefit from estimating their after-tax retirement income.

 

What About a Pension Lump Sum?

 

For SCE employees who are eligible to elect a lump sum, how the distribution is handled can have significant tax implications.

 

Receiving a taxable retirement plan distribution directly may create current taxable income. In contrast, an eligible direct rollover to another qualified retirement account can generally continue the tax-deferred treatment until distributions are taken later.

 

That does not mean a rollover is always the appropriate decision, nor should the pension election be made primarily for tax reasons. Income needs, investment risk, longevity, spouse protection, liquidity, and estate planning may all be equally important.

 

The tax implications simply need to be part of the analysis.

 

Key Question

If you are considering a pension lump sum, have you evaluated both the immediate and long-term tax implications of how that distribution will be handled?

 

How Are 401(k) and IRA Withdrawals Taxed?

 

Traditional 401(k) and IRA assets generally receive tax deferral during the accumulation years. When taxable distributions are taken in retirement, they are generally included in ordinary income.

 

California generally conforms to federal treatment of pension and IRA distributions, subject to certain California-specific adjustments.

 

This creates an important planning consideration for longtime SCE employees who may have accumulated substantial balances in pre-tax retirement accounts.

 

A large 401(k) balance can be a valuable retirement resource, but it may also represent a future tax liability because taxes have generally been deferred rather than eliminated.

 

Instead of viewing the account balance entirely as spendable money, it may be helpful to consider how future withdrawals could affect your overall taxable income.

 

California Does Not Tax Social Security

 

One favorable distinction for California retirees involves Social Security.

 

California does not tax Social Security benefits. If a portion of Social Security is included in federal adjusted gross income, California provides an adjustment excluding that amount from California taxable income.

 

Federal treatment is different. Depending on the retiree’s filing status and other income, a portion of Social Security benefits may be taxable federally. The federal calculation considers one-half of Social Security benefits together with other income, including tax-exempt interest.

 

This is another reason Social Security should be coordinated with pension income, retirement account withdrawals, and other income sources rather than considered independently.

 

Roth Conversions Can Create a California Tax Consideration

 

Roth conversions are often discussed during the years surrounding retirement.

 

A Roth conversion generally involves moving eligible pre-tax retirement assets into a Roth IRA. The taxable portion of the conversion is generally included in income during the year of conversion.

 

For someone living in California, that can mean both federal and California income tax in the conversion year because California generally follows the federal treatment of Roth conversions for residents.

 

Why would someone voluntarily recognize taxable income?

 

For certain individuals, a Roth conversion may provide greater flexibility later by reducing pre-tax retirement assets and creating a potential source of qualified tax-free income.

 

However, a conversion can also increase taxable income, potentially affect Medicare premiums, and create a larger current tax bill.

 

The decision should therefore be evaluated within a multi-year tax plan rather than viewed simply as a way to “save taxes.”

 

Required Minimum Distributions Can Change the Picture Later

 

Tax planning is particularly important because retirement income may change over time.

 

A retiree in the first several years after leaving SCE may have relatively modest taxable income. Later, Social Security may begin, pension payments may continue, and Required Minimum Distributions from pre-tax retirement accounts may add additional taxable income.

 

This can create what some retirees view as a tax-planning window between retirement and the beginning of required distributions.

 

During those years, individuals may evaluate strategies such as:

 

• Taking planned distributions from pre-tax accounts
• Completing partial Roth conversions
• Realizing capital gains strategically
• Coordinating Social Security
• Managing charitable giving

 

None of these strategies is automatically appropriate. The objective is to understand how decisions made during the early retirement years could affect taxes later.

 

Investment Income Has Its Own Tax Rules

 

Taxable investment accounts introduce another layer of planning.

 

Interest, dividends, and capital gains may receive different federal and California tax treatment depending on the type of income.

 

California generally taxes capital gains as ordinary income rather than applying a separate preferential state capital gains rate. That means investment sales can influence California taxable income in ways retirees should understand before realizing a significant gain.

 

Taxes should not dictate every investment decision, but they can be considered when determining which assets to sell and when.

 

A portfolio decision that appears attractive before taxes may look different after taxes are incorporated into the analysis.

 

Should You Leave California to Reduce Taxes?

 

Some SCE employees nearing retirement consider moving to a state with lower or no individual income tax.

 

From a tax perspective, this can create meaningful differences.

 

California’s Franchise Tax Board states that California does not impose tax on qualifying retirement income received by a nonresident, including certain pension, IRA, and retirement plan distributions.

 

However, establishing nonresident status requires a legitimate change in residency, and other California-source income can still create California tax obligations.

 

More importantly, taxes should generally not be the only factor in a relocation decision.

 

Housing, property taxes, insurance, healthcare, access to family, lifestyle, and overall cost of living should also be considered.

 

Moving simply to avoid state income taxes may not improve the overall retirement picture if other costs increase substantially.

 

Do Not Focus Only on This Year’s Tax Bill

 

One of the biggest retirement tax-planning mistakes is trying to minimize taxes every single year.

 

Imagine an SCE retiree who stops working and suddenly has much less taxable income. Avoiding distributions from traditional retirement accounts might produce a very low tax bill during those first years.

 

But if those accounts continue growing, larger taxable distributions later could potentially create a different problem.

 

Sometimes intentionally recognizing income during a lower-income year may be worth evaluating.

 

The goal is not necessarily to pay the least tax possible today. It is to consider how taxes may affect the financial plan over the course of retirement.

 

Key Question

Are you planning your taxes one year at a time, or looking at how your tax situation could evolve throughout retirement?

 

Common California Retirement Tax Mistakes

 

Assuming Retirement Income Is Tax-Free

Pension income and traditional retirement account withdrawals may remain taxable after retirement.

 

Forgetting the Difference Between Federal and California Taxes

Social Security is a good example. Benefits may be taxable federally while remaining exempt from California income tax.

 

Looking Only at the Gross Pension Amount

Retirement income should generally be evaluated on an after-tax basis.

 

Completing a Large Roth Conversion Without Modeling the Impact

A conversion may affect federal and California income taxes as well as other income-related costs.

 

Ignoring Future Required Distributions

Reducing taxes today without considering future retirement account distributions may create larger taxable income later.

 

Moving Solely for Tax Reasons

State income taxes matter, but housing, insurance, healthcare, family, and quality of life may matter just as much.

 

A Tax Checklist for SCE Employees Approaching Retirement

 

If retirement is within the next several months or year, consider whether you understand:

 

• How your SCE pension may be taxed
• The tax consequences of a lump sum versus monthly pension
• How traditional 401(k) and IRA withdrawals are taxed
• How Social Security is treated federally and by California
• Whether Roth conversions deserve consideration
• How future Required Minimum Distributions may affect taxable income
• How investment gains may affect California taxes
• Whether your planned state of residence could change your tax picture
• How much after-tax income you actually need to support your retirement lifestyle

 

The important word is coordination. Tax planning is most useful when it is integrated with the rest of the retirement plan.

 

Key Takeaways

 

For Southern California Edison employees approaching retirement, taxes should be part of the planning conversation before the final retirement date is selected.

 

California generally taxes pension income and traditional retirement account distributions, while Social Security benefits are excluded from California taxable income.

 

The transition from employment into retirement may also create opportunities to evaluate Roth conversions, withdrawal strategies, Social Security timing, investment gains, and future Required Minimum Distributions.

 

Most importantly, reducing taxes should not become the sole objective.

 

A thoughtful retirement strategy considers taxes alongside income needs, investments, healthcare, family, and the lifestyle you are trying to create.

 

Frequently Asked Questions

 

Does California tax my SCE pension?

For California residents, taxable pension income is generally subject to California income tax. The amount subject to tax may depend on the specific characteristics of the pension and whether there is any after-tax basis.

 

Does California tax 401(k) and IRA withdrawals?

Traditional retirement account distributions are generally taxable by California to the extent they are taxable federally, although California-specific adjustments can apply.

 

Does California tax Social Security?

No. California excludes Social Security benefits from state taxable income. Federal taxation may still apply depending on total income.

 

Are Roth conversions taxable in California?

For a California resident, the taxable portion of a Roth conversion is generally included in California income as well as federal income.

 

Will California tax my SCE pension if I move out of state?

California generally does not impose income tax on qualifying retirement income received by a nonresident. Residency and California-source income rules still need to be considered.

 

Should taxes determine when I retire?

Taxes may influence the timing decision, but retirement should generally be evaluated using a broader financial picture that includes SCE benefits, pension choices, Social Security, healthcare, investment resources, and lifestyle goals.

 

Final Thoughts

 

The announcement of SCE’s 2027 pension rates has understandably caused many employees nearing retirement to take another look at their plans.

 

For some, the focus will be the pension. For others, it may be whether they have accumulated enough in the 401(k), when to begin Social Security, or whether the next few months are finally the right time to leave work.

 

Taxes connect many of those decisions.

 

At Guardian Financial Partners, we believe retirement tax planning works best when it is incorporated into the broader financial plan rather than addressed after decisions have already been made. Understanding how your pension, retirement accounts, Social Security, investments, and state residency may be taxed can help you evaluate how much income will actually be available to support your lifestyle.

 

The objective is not simply to minimize taxes. It is to make informed decisions that help you preserve your assets and protect your lifestyle throughout retirement.

 

 

About the Author

 

Casey S. Bartels, CFP® is a Founding Partner of Guardian Financial Partners. Since 2007, Casey and his partners have worked with Southern California Edison employees and executives, helping them navigate retirement planning, pension decisions, tax planning considerations, and other important financial decisions.

 

Educating Edison is our educational series designed to help Southern California Edison employees better navigate their financial lives.

 

 

Guardian Financial Partners is a Registered Investment Adviser. Guardian Financial Partners is not affiliated with, endorsed by, or sponsored by Southern California Edison. The content presented in the Educating Edison series is for educational purposes only and is not intended as individualized investment, tax, or legal advice. Tax laws, retirement plan rules, and residency requirements are subject to change. Individuals should consult appropriate financial, tax, and legal professionals regarding their specific circumstances.