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Social security and equivalent railroad retirement benefits are not discussed here. For more information about these benefits, refer to Topic 423.
Your pension or annuity payments are usually fully taxable if your employer contributed all of the cost without including the cost in your taxable wages, or if you got back all your previously taxed contributions tax free in previous years.
If you contributed after–tax dollars to your pension or annuity, your pension payments are partially taxable. You will not pay tax on the part of the payment that represents a return of the after–tax amount you paid. This amount is your cost in the plan or investment, and includes the amounts your employer contributed that were taxable to you when contributed. Partly taxable pensions are taxed under either the General Rule or the Simplified Method. For more information on the General Rule and Simplified Method refer to Topic 411. If the starting date of your pension or annuity payments is after November 18, 1996, you generally must use the Simplified Method to determine how much of your annuity payments is taxable and how much is tax free.
If you receive pension or annuity payments before age 59 1/2, you may be subject to an additional 10% tax on early distributions. However, this additional tax will not apply if the payments are made after your separation from service in or after the year you reached age 55, or if the payments are part of a series of substantially equal payments that are paid over your life. For other exceptions to the tax, refer to Publication 575, Pension and Annuity Income.
The taxable part of your pension or annuity payments is generally subject to federal income tax withholding.
You may choose not to have income tax withheld from your pension or annuity payments unless they are eligible rollover distributions. If you do not want tax withheld from your pension or annuity, or if you want to specify how tax is to be withheld, provide the payer Form W-4P (PDF), Withholding Certificate for Pension or Annuity Payments, or a similar form provided by the payer. Withholding from periodic payments of a pension or annuity is generally figured the same way as for salaries and wages. If you do not give a completed withholding certificate to the payer, the payer must withhold tax as if you were married and claiming three withholding allowances. If you do not provide the payer with your correct social security number, tax will be withheld as if you were single and claiming no withholding allowances.
If too little tax is withheld, you may be required to make estimated tax payments. Refer to Topic 355 for information on estimated tax. You may also refer to Publication 505, Tax Withholding and Estimated Tax.
Special rules apply to certain non–periodic payments from qualified retirement plans. For information on the special tax treatment of lump–sum distributions, refer to Topic 412. If an eligible rollover distribution is paid to you, the payer must withhold 20% of it, unless you choose the direct rollover option. For information on the treatment of eligible rollover distributions, refer to Topic 413.
Topic 411 - Pensions – the General Rule and the Simplified Method
If you made after–tax contributions to your pension or annuity plan, you can exclude part of your pension or annuity payments from your income. You must figure this tax–free part when the payments first begin. The tax–free amount remains the same each year, even if the amount of the payment changes.
If you begin receiving annuity payments from a qualified retirement plan after November 18, 1996, generally you use the Simplified Method to figure the tax–free part of the payments. A qualified retirement plan is a qualified employee plan, a qualified employee annuity, or a tax–sheltered annuity plan. Under the Simplified Method, you figure the taxable and tax–free parts of your annuity payments by completing the Simplified Method Worksheet in the Form 1040 Instructions or Form 1040A Instructions or in Publication 575, Pension and Annuity Income. For more information on the Simplified Method, refer to Publication 575, or if you receive United States Civil Service retirement benefits, refer to Publication 721, Tax Guide to U.S. Civil Service Retirement Benefits.
If you began receiving annuity payments from a qualified retirement plan after July 1, 1986 and before November 19, 1996, you generally could have chosen to use either the Simplified Method or the General Rule to figure the tax–free part of the payments. If you receive annuity payments from a nonqualified retirement plan, you must use the General Rule. Under the General Rule, you figure the taxable and tax–free parts of your annuity payments using life expectancy tables prescribed by the IRS. For a fee, the IRS will figure the tax–free part of your annuity payments for you. For more information, refer to Publication 939, General Rule for Pensions and Annuities.
For more information, refer to Form 1040 Instructions, or Publication 17.
