This section summarizes the tax treatment of amounts you receive from traditional individual retirement arrangements, employee pensions or annuities, and disability pensions or annuities. A traditional IRA is any IRA that is not a Roth or SIMPLE IRA. A Roth IRA is an individual retirement plan that can be either an account or an annuity and that features nondeductible contributions and tax-free distributions. A SIMPLE IRA is a tax-favored retirement plan that certain small employers (including self-employed individuals) can set up for the benefit of their employees. More detailed information can be found in Publication 590, Individual Retirement Arrangements (IRAs), and Publication 575, Pension and Annuity Income.taxmap/pubs/p554-003.htm#en_us_publink100043537
Kansas or Midwestern disaster areas. Special rules may apply to your IRA distributions if your main home was in the Kansas disaster area or a Midwestern disaster area. Special rules may also apply if you received a distribution to buy or build a main home in a Midwestern disaster area, but that home was not bought or built because of the Midwestern storms, tornadoes, or flooding. For details, see Publication 4492-A (Kansas disaster area) or Publication 4492-B (Midwestern disaster areas).
In general, distributions from a traditional IRA are taxable in the year you receive them. Exceptions to the general rule are rollovers, tax-free withdrawals of contributions, and the return of nondeductible contributions. These are discussed in Publication 590.
If you made nondeductible contributions to a traditional IRA, you must file Form 8606, Nondeductible IRAs. If you do not file Form 8606 with your return, you may have to pay a $50 penalty. Also, when you receive distributions from your traditional IRA, the amounts will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made.
Generally, early distributions are amounts distributed from your traditional IRA account or annuity before you are age 591/2, or amounts you receive when you cash in retirement bonds before you are age 591/2. You must include early distributions of taxable amounts in your gross income. These taxable amounts are also subject to an additional 10% tax unless the distribution qualifies for an exception. See Tax on Early Distributions, later.taxmap/pubs/p554-003.htm#en_us_publink100043540
After you reach age 591/2, you can receive distributions from your traditional IRA without having to pay the 10% additional tax. Even though you can receive distributions after you reach age 591/2, distributions are not required until April 1 of the year following the year in which you reach age 701/2.taxmap/pubs/p554-003.htm#en_us_publink100043541
If you are the owner of a traditional IRA, you must receive the entire balance in your IRA or start receiving periodic distributions from your IRA by April 1 of the year following the year in which you reach age 701/2. See When Must You Withdraw Assets? (Required Minimum Distributions) in Publication 590. If distributions from your traditional IRA(s) are less than the required minimum distribution for the year, you may have to pay a 50% excise tax for that year on the amount not distributed as required. See Tax on Excess Accumulations, later. See also Excess Accumulations (Insufficient Distributions) in Publication 590.
No minimum distribution from your IRA is required for 2009. For details, see Publication 590.
Kansas or Midwestern disaster areas. Special rules may apply if you received a distribution from a profit-sharing or retirement plan and your main home was in the Kansas disaster area or a Midwestern disaster area. Special rules may also apply if you received a distribution to buy or build a main home in a Midwestern disaster area, but that home was not bought or built because of the Midwestern storms, tornadoes, or flooding. For details, see Publication 4492-A (Kansas disaster area) or Publication 4492-B (Midwestern disaster areas).
Generally, if you did not pay any part of the cost of your employee pension or annuity, and your employer did not withhold part of the cost of the contract from your pay while you worked, the amounts you receive each year are fully taxable. However, see Insurance Premiums for Retired Public Safety Officers, later.
If you paid part of the cost of your pension or annuity plan (see Cost, later), you can exclude part of each annuity payment from income as a recovery of your cost (investment in the contract). This tax-free part of the payment is figured when your annuity starts and remains the same each year, even if the amount of the payment changes. The rest of each payment is taxable. However, see Insurance Premiums for Retired Public Safety Officers, later.
You figure the tax-free part of the payment using one of the following methods.
- Simplified Method. You generally must use this method if your annuity is paid under a qualified plan (a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan or contract). You cannot use this method if your annuity is paid under a nonqualified plan.
- General Rule. You must use this method if your annuity is paid under a nonqualified plan. You generally cannot use this method if your annuity is paid under a qualified plan.
Contact your employer or plan administrator to find out if your pension or annuity is paid under a qualified or nonqualified plan.
You determine which method to use when you first begin receiving your annuity, and you continue using it each year that you recover part of your cost. taxmap/pubs/p554-003.htm#en_us_publink100043544
If you contributed to your pension or annuity and your annuity starting date is before 1987, you can continue to take your monthly exclusion for as long as you receive your annuity. If you chose a joint and survivor annuity, your survivor can continue to take the survivor's exclusion figured as of the annuity starting date. The total exclusion may be more than your cost.
If your annuity starting date is after 1986, the total amount of annuity income you can exclude over the years as a recovery of the cost cannot exceed your total cost.
In either case, any unrecovered cost at your (or the last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. This deduction is not subject to the 2%-of-adjusted-gross-income limit on miscellaneous deductions. taxmap/pubs/p554-003.htm#en_us_publink100043545
Before you can figure how much, if any, of your pension or annuity benefits are taxable, you must determine your cost in the plan (your investment in the contract). Your total cost in the plan includes everything that you paid. It also includes amounts your employer contributed that were taxable to you when paid. However, see Foreign employment contributions, next.
From this total cost, subtract any refunded premiums, rebates, dividends, unrepaid loans, or other tax-free amounts you received by the later of the annuity starting date or the date on which you received your first payment.
The annuity starting date is the later of the first day of the first period for which you received a payment from the plan or the date on which the plan's obligations became fixed.
The amount of your contributions to the plan may be shown in box 9b of any Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that you receive.
If you worked abroad, certain amounts your employer paid into your retirement plan that were not includible in your gross income may be considered part of your cost. For details, see Foreign employment contributions in Publication 575. taxmap/pubs/p554-003.htm#en_us_publink100043548
The payer of your pension, profit-sharing, stock bonus, annuity, or deferred compensation plan will withhold income tax on the taxable part of amounts paid to you. However, you can choose not to have tax withheld on the payments you receive, unless they are eligible rollover distributions. (These are distributions that are eligible for rollover treatment but are not paid directly to another qualified retirement plan or to a traditional IRA.) See Withholding Tax and Estimated Tax and Rollovers in Publication 575 for more information.
For payments other than eligible rollover distributions, you can tell the payer how much to withhold by filing a Form W-4P, Withholding Certificate for Pension or Annuity Payments.taxmap/pubs/p554-003.htm#en_us_publink100043549
Under the Simplified Method, you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. For an annuity that is payable over the lives of the annuitants, this number is based on the annuitants' ages on the annuity starting date and is determined from a table. For any other annuity, this number is the number of monthly annuity payments under the contract. taxmap/pubs/p554-003.htm#en_us_publink100043550
You must use the Simplified Method if your annuity starting date is after November 18, 1996, and you receive your pension or annuity payments from a qualified plan or annuity, unless you were at least 75 years old and entitled to at least 5 years of guaranteed payments (defined next).
In addition, if your annuity starting date is after July 1, 1986, and before November 19, 1996, you could have chosen to use the Simplified Method for payments from a qualified plan, unless you were at least 75 years old and entitled to at least 5 years of guaranteed payments. If you chose to use the Simplified Method, you must continue to use it each year that you recover part of your cost. taxmap/pubs/p554-003.htm#en_us_publink100043551
Your annuity contract provides guaranteed payments if a minimum number of payments or a minimum amount (for example, the amount of your investment) is payable even if you and any survivor annuitant do not live to receive the minimum. If the minimum amount is less than the total amount of the payments you are to receive, barring death, during the first 5 years after payments begin (figured by ignoring any payment increases), you are entitled to less than 5 years of guaranteed payments. taxmap/pubs/p554-003.htm#en_us_publink100043552
You cannot use the Simplified Method and must use the General Rule if you receive pension or annuity payments from:
- A nonqualified plan, such as a private annuity, a purchased commercial annuity, or a nonqualified employee plan, or
- A qualified plan if you are age 75 or older on your annuity starting date and you are entitled to at least 5 years of guaranteed payments (defined above).
In addition, you had to use the General Rule for either circumstance described above if your annuity starting date is after July 1, 1986, and before November 19, 1996. If you did not have to use the General Rule, you could have chosen to use it. You also had to use the General Rule for payments from a qualified plan if your annuity starting date is before July 2, 1986, and you did not qualify to use the Three-Year Rule.
If you had to use the General Rule (or chose to use it), you must continue to use it each year that you recover your cost.
Complete information on the General Rule, including the actuarial tables you need, is contained in Publication 939, General Rule for Pensions and Annuities.taxmap/pubs/p554-003.htm#en_us_publink100043553
Complete the Simplified Method Worksheet in the Form 1040, Form 1040A, or Form 1040NR instructions or in Publication 575 to figure your taxable annuity for 2008. To complete line 3 of the worksheet, you must determine the total number of expected monthly payments for your annuity. If your annuity is payable only over your life, use your age on the annuity starting date to determine this number. For annuity starting dates beginning in 1998, if your annuity is payable over your life and the lives of other individuals, use the combined ages of you and the youngest survivor annuitant at the annuity starting date. If the annuity does not depend on anyone's life expectancy, use the total number of monthly annuity payments under the contract.
Be sure to keep a copy of the completed worksheet; it will help you figure your taxable annuity in later years.
Bill Smith, age 65, began receiving retirement benefits in 2008, under a joint and survivor annuity. Bill's annuity starting date is January 1, 2008. The benefits are to be paid over the joint lives of Bill and his wife, Kathy, age 65. Bill had contributed $31,000 to a qualified plan and had received no distributions before the annuity starting date. Bill is to receive a retirement benefit of $1,200 a month, and Kathy is to receive a monthly survivor benefit of $600 upon Bill's death.
Bill must use the Simplified Method to figure his taxable annuity because his payments are from a qualified plan and he is under age 75. See the illustrated Worksheet 2-A, Simplified Method Worksheet, later.
His annuity is payable over the lives of more than one annuitant, so Bill uses his and Kathy's combined ages, 130 (65 + 65), and Table 2 at the bottom of the worksheet in completing line 3 of the worksheet and finds the line 3 amount to be 310. Bill's tax-free monthly amount is $100 ($31,000 ÷ 310 as shown on line 4 of the worksheet). Upon Bill's death, if Bill has not recovered the full $31,000 investment, Kathy will also exclude $100 from her $600 monthly payment. The full amount of any annuity payments received after 310 payments are paid must generally be included in gross income.
If Bill and Kathy die before 310 payments are made, a miscellaneous itemized deduction will be allowed for the unrecovered cost on the final income tax return of the last to die. This deduction is not subject to the 2%-of-adjusted-gross-income limit.
Worksheet 2-A. Simplified Method Worksheet—Illustrated
|1.||Enter the total pension or annuity payments received this year. Also, add this amount to the total for Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a ||1.||$ 14,400|
|2.||Enter your cost in the plan (contract) at the annuity starting date plus any death benefit exclusion*||2.||31,000|
| ||Note. If your annuity starting date was before this year and you completed this worksheet last year, skip line 3 and enter the amount from line 4 of last year's worksheet on line 4 below. Otherwise, go to line 3. || || |
|3.||Enter the appropriate number from Table 1 below. But if your annuity starting date was after 1997 and the payments are for your life and that of your beneficiary, enter the appropriate number from Table 2 below ||3.||310|
|4.||Divide line 2 by line 3||4.||100|
|5.||Multiply line 4 by the number of months for which this year's payments were made. If your annuity starting date was before 1987, enter this amount on line 8 below and skip lines 6, 7, 10, and 11. Otherwise, go to line 6 ||5.||1,200|
|6.||Enter any amount previously recovered tax free in years after 1986. This is the amount shown on line 10 of your worksheet for last year ||6.||0|
|7.||Subtract line 6 from line 2||7.||31,000|
|8.||Enter the smaller of line 5 or line 7||8.||1,200|
|9.||Taxable amount for year. Subtract line 8 from line 1. Enter the result, but not less than zero. Also, add this amount to the total for Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Note. If your Form 1099-R shows a larger taxable amount, use the amount on this line instead. If you are a retired public safety officer, see Insurance Premiums for Retired Public Safety Officers, later, before entering an amount on your tax return. ||9.||$ 13,200|
|10.||Was your annuity starting date before 1987?|
□ Yes. STOP. Do not complete the rest of this worksheet.
□ No. Add lines 6 and 8. This is the amount you have recovered tax free through 2008. You will need this number if you need to fill out this worksheet next year.
|11.||Balance of cost to be recovered. Subtract line 10 from line 2. If zero, you will not have to complete this worksheet next year. The payments you receive next year will generally be fully taxable ||11.||$ 29,800|
* A death benefit exclusion (up to $5,000) applied to certain benefits received by employees who died before August 21, 1996.
|Table 1 for Line 3 Above|
| || || ||AND your annuity starting date was—|
| ||IF your age on your|
annuity starting date was . . .
| ||before November 19, 1996, THEN enter on line 3 . . .||after November 18, 1996, |
THEN enter on line 3 . . .
| ||55 or under||300||360|
| ||71 or over||120||160|
|Table 2 for Line 3 Above|
| ||IF the annuitants' combined ages on your annuity starting date were . . .|| ||THEN enter on line 3 . . .|| || || |
| ||110 or under|| ||410|| || || |
| ||111-120|| ||360|| || || |
| ||121-130|| ||310|| || || |
| ||131-140|| ||260|| || || |
| ||141 or over|| ||210|| || || |
| || || || || || || |
| || || || || || || |
Benefits paid to you as a survivor under a joint and survivor annuity must be included in your gross income in the same way the retiree would have included them in gross income.
If you receive a survivor annuity because of the death of a retiree who had reported the annuity under the Three-Year Rule, include the total received in your income. The retiree's cost has already been recovered tax free.
If the retiree was reporting the annuity payments under the General Rule, you must apply the same exclusion percentage the retiree used to your initial payment called for in the contract. The resulting tax-free amount will then remain fixed. Any increases in the survivor annuity are fully taxable.
If the retiree was reporting the annuity payments under the Simplified Method, the part of each payment that is tax free is the same as the tax-free amount figured by the retiree at the annuity starting date. See Simplified Method, earlier. taxmap/pubs/p554-003.htm#en_us_publink100043557
If you file Form 1040, report your total annuity on line 16a, and the taxable part on line 16b. If your pension or annuity is fully taxable, enter it on line 16b. Do not make an entry on line 16a.
If you file Form 1040A, report your total annuity on line 12a, and the taxable part on line 12b. If your pension or annuity is fully taxable, enter it on line 12b. Do not make an entry on line 12a.
If you file Form 1040NR, report your total annuity on line 17a, and the taxable part on line 17b. If your pension or annuity is fully taxable, enter it on line 17b. Do not make an entry on line 17a.taxmap/pubs/p554-003.htm#en_us_publink100043558
You are a Form 1040 filer and you received monthly payments totaling $1,200 during 2008 from a pension plan that was completely financed by your employer. You had paid no tax on the payments that your employer made to the plan, and the payments were not used to pay for accident, health, or long-term care insurance premiums (as discussed later under Insurance Premiums for Retired Public Safety Officers). The entire $1,200 is taxable. You include $1,200 only on Form 1040, line 16b.taxmap/pubs/p554-003.htm#en_us_publink100043559
If you file a joint return and you and your spouse each receive one or more pensions or annuities, report the total of the pensions and annuities on line 16a of Form 1040, line 12a of Form 1040A, or line 17a of Form 1040NR. Report the total of the taxable parts on line 16b of Form 1040, line 12b of Form 1040A, or line 17b of Form 1040NR. taxmap/pubs/p554-003.htm#en_us_publink100043560
You should receive a Form 1099-R for your pension or annuity. Form 1099-R shows your pension or annuity for the year and any income tax withheld. You should receive a Form W-2 if you receive distributions from certain nonqualified plans.
You must attach Forms 1099-R or Forms W-2 to your 2008 tax return if federal income tax was withheld. Generally, you should be sent these forms by February 2, 2009.
If you receive a nonperiodic distribution from your retirement plan, you may be able to exclude all or part of it from your income as a recovery of your cost. Nonperiodic distributions include cash withdrawals, distributions of current earnings (dividends) on your investment, and certain loans. For information on how to figure the taxable amount of a nonperiodic distribution, see Taxation of Nonperiodic Payments in Publication 575.
The taxable part of a nonperiodic distribution may be subject to an additional 10% tax. See Tax on Early Distributions, later.
If you receive a lump-sum distribution from a qualified employee plan or qualified employee annuity and the plan participant was born before January 2, 1936, you may be able to elect optional methods of figuring the tax on the distribution. The part from active participation in the plan before 1974 may qualify as capital gain subject to a 20% tax rate. The part from participation after 1973 (and any part from participation before 1974 that you do not report as capital gain) is ordinary income. You may be able to use the 10-year tax option to figure tax on the ordinary income part. taxmap/pubs/p554-003.htm#en_us_publink100043565
If you receive a total distribution from a plan, you should receive a Form 1099-R. If the distribution qualifies as a lump-sum distribution, box 3 shows the capital gain part of the distribution. The amount in box 2a minus the amount in box 3 is the ordinary income part. taxmap/pubs/p554-003.htm#en_us_publink100043566
For more detailed information on lump-sum distributions, see Publication 575 or Form 4972, Tax on Lump-Sum Distributions.taxmap/pubs/p554-003.htm#en_us_publink100043567
Most distributions you receive from your qualified retirement plan and nonqualified annuity contracts before you reach age 591/2 are subject to an additional tax of 10%. The tax applies to the taxable part of the distribution.
For this purpose, a qualified retirement plan is:
- A qualified employee plan,
- A qualified employee annuity plan,
- A tax-sheltered annuity plan (403(b) plan),
- An IRA, or
- An eligible state or local government section 457 deferred compensation plan (to the extent that any distribution is attributable to amounts the plan received in a direct transfer or rollover from one of the other plans listed here).
The early distribution tax does not apply to any distributions that are:
- Made as part of a series of substantially equal periodic payments (made at least annually) for your life (or life expectancy) or the joint lives (or joint life expectancies) of you and your designated beneficiary (if from a qualified retirement plan, the payments must begin after separation from service),
- Made because you are totally and permanently disabled, or
- Made on or after the death of the plan participant or contract holder.
There are additional exceptions to the early distribution tax for certain distributions from qualified retirement plans and nonqualified annuity contracts. See Publication 575 for details.taxmap/pubs/p554-003.htm#en_us_publink100043570
If you owe only the tax on early distributions and distribution code 1 (early distribution, no known exception) is correctly shown in Form 1099-R, box 7, multiply the taxable part of the early distribution by 10% (.10) and enter the result on Form 1040, line 59, or Form 1040NR, line 54. See the instructions for line 59 of Form 1040 or line 54 of Form 1040NR for more information about reporting the early distribution tax.taxmap/pubs/p554-003.htm#en_us_publink100043571
To make sure that most of your retirement benefits are paid to you during your lifetime, rather than to your beneficiaries after your death, the payments that you receive from qualified retirement plans must begin no later than your required beginning date. Unless the rule for 5% owners applies, this is generally April 1 of the year that follows the later of:
- The calendar year in which you reach age 701/2, or
- The calendar year in which you retire from employment with the employer maintaining the plan.
However, your plan may require you to begin to receive payments by April 1 of the year that follows the year in which you reach 701
, even if you have not retired.
For this purpose, a qualified retirement plan includes:
- A qualified employee plan,
- A qualified employee annuity plan,
- An eligible section 457 deferred compensation plan, or
- A tax-sheltered annuity plan (403(b) plan) (for benefits accruing after 1986).
An excess accumulation is the undistributed remainder of the required minimum distribution that was left in your qualified retirement plan.
If you own (or are considered to own under section 318 of the Internal Revenue Code) more than 5% of the company maintaining your qualified retirement plan, you must begin to receive distributions from the plan by April 1 of the year after the calendar year in which you reach age 701/2. See Publication 575 for more information.taxmap/pubs/p554-003.htm#en_us_publink100043574
If you do not receive the required minimum distribution, you are subject to an additional tax. The tax equals 50% of the difference between the amount that must be distributed and the amount that was distributed during the tax year. You can get this excise tax excused if you establish that the shortfall in distributions was due to reasonable error and that you are taking reasonable steps to remedy the shortfall.
Generally, no minimum distribution is required for 2009. For details, see Publication 575.
You must file a Form 5329 if you owe a tax because you did not receive a minimum required distribution from your qualified retirement plan.taxmap/pubs/p554-003.htm#en_us_publink100043576
For more detailed information on the tax on excess accumulation, see Publication 575.taxmap/pubs/p554-003.htm#en_us_publink100043577
If you are an eligible retired public safety officer (law enforcement officer, firefighter, chaplain, or member of a rescue squad or ambulance crew), you can elect to exclude from income distributions made from your eligible retirement plan that are used to pay the premiums for accident or health insurance or long-term care insurance. The premiums can be for coverage for you, your spouse, or dependents. The distribution must be made directly from the plan to the insurance provider. You can exclude from income the smaller of the amount of the insurance premiums or $3,000. You can only make this election for amounts that would otherwise be included in your income. The amount excluded from your income cannot be used to claim a medical expense deduction.
An eligible retirement plan is a governmental plan that is:
- a qualified trust,
- a section 403(a) plan,
- a section 403(b) annuity, or
- a section 457(b) plan.
If you make this election, reduce the otherwise taxable amount of your pension or annuity by the amount excluded. The taxable amount shown in box 2a of any Form 1099-R that you receive does not reflect the exclusion. Report your total distributions on Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a. Report the taxable amount on Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b. Enter "PSO" next to the appropriate line on which you report the taxable amount.taxmap/pubs/p554-003.htm#en_us_publink100043578
Benefits paid under the Railroad Retirement Act fall into two categories. These categories are treated differently for income tax purposes.taxmap/pubs/p554-003.htm#en_us_publink100043579
The first category is the amount of tier 1 railroad retirement benefits that equals the social security benefit that a railroad employee or beneficiary would have been entitled to receive under the social security system. This part of the tier 1 benefit is the social security equivalent benefit (SSEB) and is treated (for tax purposes) like social security benefits. (See Social Security and Equivalent Railroad Retirement Benefits, later.)taxmap/pubs/p554-003.htm#en_us_publink100043580
The second category contains the rest of the tier 1 benefits, called the non-social security equivalent benefit (NSSEB). It also contains any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. This category of benefits is treated as an amount received from a qualified employee plan. This allows for the tax-free (nontaxable) recovery of employee contributions from the tier 2 benefits and the NSSEB part of the tier 1 benefits. Vested dual benefits and supplemental annuity benefits are non-contributory pensions and are fully taxable.taxmap/pubs/p554-003.htm#en_us_publink100043581
For more information about railroad retirement benefits, see Publication 575.taxmap/pubs/p554-003.htm#en_us_publink100043582
Military retirement pay based on age or length of service is taxable and must be included in income as a pension on Form 1040, lines 16a and 16b or on Form 1040A, lines 12a and 12b. But, certain military and government disability pensions that are based on a percentage of disability from active service in the Armed Forces of any country generally are not taxable. For more information, including information about veterans' benefits and insurance, see Publication 525.