Distributions from your pension or annuity plan may include amounts treated as a recovery of your cost (investment in the contract). If any part of a distribution is treated as a recovery of your cost under the rules explained in this publication, that part is tax free. Therefore, the first step in figuring how much of a distribution is taxable is to determine the cost of your pension or annuity.
In general, your cost is your net investment in the contract as of the annuity starting date (or the date of the distribution, if earlier). To find this amount, you must first figure the total premiums, contributions, or other amounts you paid. This includes the amounts your employer contributed that were taxable to you when paid. (However, see Foreign employment contributions, later.) It does not include amounts withheld from your pay on a tax-deferred basis (money that was taken out of your gross pay before taxes were deducted). It also does not include amounts you contributed for health and accident benefits (including any additional premiums paid for double indemnity or disability benefits).
From this total cost you must subtract the following amounts.
- Any refunded premiums, rebates, dividends, or unrepaid loans that were not included in your income and that you received by the later of the annuity starting date or the date on which you received your first payment.
- Any other tax-free amounts you received under the contract or plan by the later of the dates in (1).
- If you must use the Simplified Method for your annuity payments, the tax-free part of any single-sum payment received in connection with the start of the annuity payments, regardless of when you received it. (See Simplified Method, later, for information on its required use.)
- If you use the General Rule for your annuity payments, the value of the refund feature in your annuity contract. (See General Rule, later, for information on its use.) Your annuity contract has a refund feature if the annuity payments are for your life (or the lives of you and your survivor) and payments in the nature of a refund of the annuity's cost will be made to your beneficiary or estate if all annuitants die before a stated amount or a stated number of payments are made. For more information, see Publication 939.
The tax treatment of the items described in (1) through (3) is discussed later under Taxation of Nonperiodic Payments.
Form 1099-R. If you began receiving periodic payments of a life annuity in 2008, the payer should show your total contributions to the plan in box 9b of your 2008 Form 1099-R.
Your annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan's obligations became fixed.taxmap/pubs/p575-001.htm#en_us_publink10004410
On January 1, you completed all your payments required under an annuity contract providing for monthly payments starting on August 1 for the period beginning July 1. The annuity starting date is July 1. This is the date you use in figuring the cost of the contract and selecting the appropriate number from Table 1 for line 3 of the Simplified Method Worksheet. taxmap/pubs/p575-001.htm#en_us_publink10004411
Your cost in these accounts is your designated Roth contributions that were included in your income as wages subject to applicable withholding requirements.taxmap/pubs/p575-001.htm#en_us_publink10004412
If you worked abroad, your cost includes amounts contributed by your employer that were not includible in your gross income. This applies to contributions that were made either:
- Before 1963 by your employer for that work,
- After 1962 by your employer for that work if you performed the services under a plan that existed on March 12, 1962, or
- After 1996 by your employer on your behalf if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person).
In determining your cost, special rules apply if you are a U.S. citizen or resident alien who received distributions in 2008 from a plan to which contributions were made while you were a nonresident alien. Your contributions and your employer's contributions are not included in your cost if the contribution:
- Was made based on compensation which was for services performed outside the United States while you were a nonresident alien, and
- Was not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if paid as cash compensation when the services were performed.