If you receive retirement benefits in the
form of, pension or annuity payments from a qualified employer retirement plan, all
or some portion of the amounts you receive may be taxable.
This topic doesn’t cover the taxation of social security and equivalent railroad retirement
benefits. For information about tax on those benefits, refer to Topic 423 and, Are My Social
Security or Railroad Retirement Tier I Benefits Taxable? On IRS website.
The pension or annuity payments that you receive are fully taxable if, you have no investment
in the contract, sometimes referred to as “cost” or “basis”, due to any of the following
situations. You didn’t contribute anything or, aren’t
considered to have contributed anything for your pension or annuity.
Your employer didn’t withhold contributions from your salary, or,
You received all of your contributions tax-free in prior years.
If you contributed after-tax dollars to your pension or annuity, your pension payments
are partially taxable. You won’t pay tax on, the part of the payment that represents a,
return of the after-tax amount you paid. This amount is your investment in the contract
and, it includes the amounts your employer contributed that were taxable to you when
contributed. Taxpayers figure the tax on partly taxable pensions by using 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 payment is taxable and, how much is tax-free.
If you receive pension or annuity payments before age 59 ½, you may be subject to an
additional 10% tax on early distributions, unless, the distribution qualifies for an
exception. The additional tax, doesn’t apply to any part of a distribution that’s tax-free
or, to any of the following types of distributions: Distributions made as a part of a series of,
substantially equal periodic payments, which begins after your separation from service.
Distributions made because, you’re totally and permanently disabled.
Distributions made on or after the death of the plan participant or contract holder, and,
Distributions made after your separation from service and, in or after the year you reached
age 55. For other exceptions to the additional 10%
tax, refer to Publication 575, Pension and Annuity Income on IRS website.
If you’re a survivor or beneficiary of a pension plan participant or annuitant, refer to Publication
575 for rules relating to, income inclusion. The taxable part of your pension or annuity
payments is generally subject to federal income tax withholding.
You may be able to choose not to have income tax withheld from your pension or annuity
payments unless, they’re eligible rollover distributions or, you may want to specify,
how much tax is withheld. If so, provide the payer Form W – 4 P , Withholding Certificate
for Pension or Annuity Payments, or, a similar form provided by the payer along with your
social security number. If you’re a U.S. citizen or resident alien, you must provide the payer
with a home address in the United States to be able to choose to have, no tax withheld.
Payers generally figure the withholding from periodic payments of a pension or annuity
the same way as for, salaries and wages. If you don’t submit the Form W – 4 P withholding
certificate, the payer must withhold tax as if you were married and, claiming three withholding
allowances. Even if you submit a Form W – 4 P and elect a lower amount, if you don’t provide
the payer with your correct Social Security Number, tax will be withheld as if you were
single and, claiming no withholding allowances. If you pay your taxes through withholding
and the withheld tax isn’t enough, you may also need to make estimated tax payments to
ensure you don’t underpay taxes during the tax year. For more information on increasing
withholding tax, making estimated tax payments, and the consequences of not withholding the
proper amount of tax, refer to Publication 505, Tax Withholding and Estimated Tax on
IRS website. 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 you receive an eligible rollover distribution,
the payer must withhold 20% of it, even if you intend to roll it over later. You can
avoid this withholding by choosing the direct rollover option. A distribution sent to you
in the form of a check payable to the receiving plan or, I R A isn’t subject to withholding.
For more information on rollovers, refer to Topic 413.
For more information, refer to Publication 575 and Is My Pension or Annuity Payment Taxable?
On IRS website.