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.