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Rev. date: 12/09/2014

Pensions and Annuities

Tax Topic 410
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 does not cover the taxation of Social Security and equivalent railroad retirement benefits. For information about tax on these benefits, refer to Tax Topic 423.
The pension or annuity payments that you receive are fully taxable if you have no investment in the contract due to any of the following situations:
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 investment in the contract, and 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 Tax 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 59½, you may be subject to an additional 10% tax on early distributions, unless the distribution qualifies for an exception. The additional tax does not apply to any part of a distribution that is tax-free or to any of the following types of distributions:
For other exceptions to the additional 10% tax, refer to Publication 575, Pension and Annuity Income.
If you are 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 are eligible rollover distributions) or may want to specify how much tax is withheld. If so, provide the payer Form W-4P, Withholding Certificate for Pension or Annuity Payments, or a similar form provided by the payer. If you are a U.S. citizen or resident alien and you do not provide the payer a home address in the United States or its possessions, you cannot 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 do not submit the withholding certificate, the payer must withhold tax as if you were married and claiming three withholding allowances. Even if you submit a Form W-4P and elect a lower amount, 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 you pay your taxes through withholding and the withheld tax is not enough, you may also need to make estimated tax payments to ensure you do not 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.
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 Tax 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 IRA is not subject to withholding. For more information, refer to Tax Topic 413.