General Information

Some of the terms used in this publication are defined in the following paragraphs.

• A pension is generally a series of definitely determinable payments made to you after you retire from work. Pension payments are made regularly and are based on certain factors, such as years of service with your employer or your prior compensation.
• An annuity is a series of payments under a contract made at regular intervals over a period of more than one full year. They can be either fixed (under which you receive a definite amount) or variable (not fixed). You can buy the contract alone or with the help of your employer.

• A qualified employee plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries and that meets Internal Revenue Code requirements. It qualifies for special tax benefits, such as tax deferral for employer contributions and capital gain treatment or the 10-year tax option for lump-sum distributions (if participants qualify). To determine whether your plan is a qualified plan, check with your employer or the plan administrator.
• A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements.
• A tax-sheltered annuity plan (often referred to as a 403(b) plan or a tax-deferred annuity plan) is a retirement plan for employees of public schools and certain tax-exempt organizations. Generally, a tax-sheltered annuity plan provides retirement benefits by purchasing annuity contracts for its participants.

Types of pensions and annuities. Pensions and annuities include the following types.

1. Fixed-period annuities. You receive definite amounts at regular intervals for a specified length of time.
2. Annuities for a single life. You receive definite amounts at regular intervals for life. The payments end at death.
3. Joint and survivor annuities. The first annuitant receives a definite amount at regular intervals for life. After he or she dies, a second annuitant receives a definite amount at regular intervals for life. The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant.
4. Variable annuities. You receive payments that may vary in amount for a specified length of time or for life. The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds, cost-of-living indexes, or earnings from a mutual fund.
5. Disability pensions. You receive disability payments because you retired on disability and have not reached minimum retirement age.

More than one program. You may receive employee plan benefits from more than one program under a single trust or plan of your employer. If you participate in more than one program, you may have to treat each as a separate contract, depending upon the facts in each case. Also, you may be considered to have received more than one pension or annuity. Your former employer or the plan administrator should be able to tell you if you have more than one pension or annuity contract.

Example. Your employer set up a noncontributory profit-sharing plan for its employees. The plan provides that the amount held in the account of each participant will be paid when that participant retires. Your employer also set up a contributory defined benefit pension plan for its employees providing for the payment of a lifetime pension to each participant after retirement.

The amount of any distribution from the profit-sharing plan depends on the contributions (including allocated forfeitures) made for the participant and the earnings from those contributions. Under the pension plan, however, a formula determines the amount of the pension benefits. The amount of contributions is the amount necessary to provide that pension.

Each plan is a separate program and a separate contract. If you get benefits from these plans, you must account for each separately, even though the benefits from both may be included in the same check.

Qualified domestic relations order (QDRO). A spouse or former spouse who receives part of the benefits from a retirement plan under a QDRO reports the payments received as if he or she were a plan participant. The spouse or former spouse is allocated a share of the participant's cost (investment in the contract) equal to the cost times a fraction. The numerator (top part) of the fraction is the present value of the benefits payable to the spouse or former spouse. The denominator (bottom part) is the present value of all benefits payable to the participant.

A distribution that is paid to a child or other dependent under a QDRO is taxed to the plan participant.

What is a QDRO? A QDRO is a judgment, decree, or order relating to payment of child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent. The QDRO must contain certain specific information, such as the name and last known mailing address of the participant and each alternate payee, and the amount or percentage of the participant's benefits to be paid to each alternate payee. A QDRO may not award an amount or form of benefit that is not available under the plan.

Variable Annuities

The tax rules in this publication apply both to annuities that provide fixed payments and to annuities that provide payments that vary in amount based on investment results or other factors. For example, they apply to commercial variable annuity contracts, whether bought by an employee retirement plan for its participants or bought directly from the issuer by an individual investor. Under these contracts, the owner can generally allocate the purchase payments among several types of investment portfolios or mutual funds and the contract value is determined by the performance of those investments. The earnings are not taxed until distributed either in a withdrawal or in annuity payments. The taxable part of a distribution is treated as ordinary income.

For information on the tax treatment of a transfer or exchange of a variable annuity contract, see Transfers of Annuity Contracts under Taxation of Nonperiodic Payments, later.

Withdrawals. If you withdraw funds before your annuity starting date and your annuity is under a qualified retirement plan, a ratable part of the amount withdrawn is tax free. The tax-free part is based on the ratio of your cost (investment in the contract) to your account balance under the plan.

If your annuity is under a nonqualified plan (including a contract you bought directly from the issuer), the amount withdrawn is allocated first to earnings (the taxable part) and then to your cost (the tax-free part). However, if you bought your annuity contract before August 14, 1982, a different allocation applies to the investment before that date and the earnings on that investment. To the extent the amount withdrawn does not exceed that investment and earnings, it is allocated first to your cost (the tax-free part) and then to earnings (the taxable part).

If you withdraw funds (other than as an annuity) on or after your annuity starting date, the entire amount withdrawn is generally taxable.

The amount you receive in a full surrender of your annuity contract at any time is tax free to the extent of any cost that you have not previously recovered tax free. The rest is taxable.

For more information on the tax treatment of withdrawals, see Taxation of Nonperiodic Payments, later. If you withdraw funds from your annuity before you reach age 59 1/2, also see Tax on Early Distributions under Special Additional Taxes, later.

Annuity payments. If you receive annuity payments under a variable annuity plan or contract, you recover your cost tax free under either the Simplified Method or the General Rule, as explained under Taxation of Periodic Payments, later. For a variable annuity paid under a qualified plan, you generally must use the Simplified Method. For a variable annuity paid under a nonqualified plan (including a contract you bought directly from the issuer), you must use a special computation under the General Rule. For more information, see Variable annuities in Publication 939 under Computation Under the General Rule.

Death benefits. If you receive a single-sum distribution from a variable annuity contract because of the death of the owner or annuitant, the distribution is generally taxable only to the extent it is more than the unrecovered cost of the contract. If you choose to receive an annuity, the payments are subject to tax as described above. If the contract provides a joint and survivor annuity and the primary annuitant had received annuity payments before death, you figure the tax-free part of annuity payments you receive as the survivor in the same way the primary annuitant did. See Survivors and Beneficiaries, later.

Section 457 Deferred Compensation Plans

If you work for a state or local government or for a tax-exempt organization, you may be able to participate in an eligible section 457 deferred compensation plan. You are not taxed currently on your pay that is deferred under this plan. You, or your beneficiary, are taxed on this deferred pay only when it is distributed or made available to either of you.

For information on the limits on deferrals under section 457 plans and how to treat excess deferrals, see Retirement Plan Contributions under Employee Compensation in Publication 525.

Is your plan eligible? To find out if your plan is an eligible plan, check with your employer. The following plans are not treated as eligible section 457 plans.

1. Bona fide vacation leave, sick leave, compensatory time, severance pay, disability pay, or death benefit plans.
2. Nonelective deferred compensation plans for nonemployees (independent contractors).
3. Deferred compensation plans maintained by churches for church employees.
4. Length of service award plans for bona fide volunteer firefighters and emergency medical personnel. An exception applies if the total amount paid to a volunteer exceeds $3,000 for any year of service.

Tax treatment of plan distributions. A distribution of deferred pay from a section 457 plan is not eligible for the 10-year tax option, discussed later. Also, the tax on early distributions, discussed later, generally does not apply to early distributions from a section 457 plan.

The tax on early distributions may apply to certain distributions made from an eligible state or local government plan after 2001. For more information, see Tax on Early Distributions, later.

You may be subject to a tax on excess accumulation if you do not begin receiving minimum distributions from the plan by your required beginning date. For more information, see Tax on Excess Accumulation, later.

You may be able to defer tax on a distribution made after 2001 from an eligible state or local government plan by rolling it over into another retirement plan or a traditional IRA. For more information, see Rollovers, later.

An eligible section 457 plan distribution is reported to you on Form W-2 (not on Form 1099-R), unless you are the beneficiary of a deceased employee.

Disability Pensions

If you retired on disability, you must include in income any disability pension you receive under a plan that is paid for by your employer. You must report your taxable disability payments as wages on line 7 of Form 1040 or Form 1040A until you reach minimum retirement age. Minimum retirement age generally is the age at which you can first receive a pension or annuity if you are not disabled.

You may be entitled to a tax credit if you were permanently and totally disabled when you retired. For information on this credit, see Publication 524.

Beginning on the day after you reach minimum retirement age, payments you receive are taxable as a pension or annuity. Report the payments on lines 16a and 16b of Form 1040, or on lines 12a and 12b of Form 1040A.

As this publication was being prepared for print, Congress was considering legislation that would exempt from tax disability benefits received by any individual for injuries resulting from a terrorist or military action outside or within the United States. For more information, see Publication 3920.

Railroad Retirement

Benefits paid under the Railroad Retirement Act fall into two categories. These categories are treated differently for income tax purposes.

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 you treat it for tax purposes like social security benefits. If you received or repaid the SSEB portion of tier 1 benefits during 2001, you will receive Form RRB-1099, Payments by the Railroad Retirement Board (or Form RRB-1042S, Statement for Nonresident Aliens of: Payments by the Railroad Retirement Board, if you are a nonresident alien) from the U.S. Railroad Retirement Board (RRB).

For more information about the tax treatment of the SSEB portion of tier 1 benefits and Forms RRB-1099 and RRB-1042S, see Publication 915.

The second category contains the rest of the tier 1 railroad retirement benefits, called the non-social security equivalent benefit (NSSEB). It also contains any tier 2 benefit, vested dual benefit (VDB), and supplemental annuity benefit. Treat this category of benefits, shown on Form RRB-1099-R, Annuities or Pensions by the Railroad Retirement Board, 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. (NSSEB and tier 2 benefits, less certain repayments, are combined into one amount called the Contributory Amount Paid on Form RRB-1099-R.) Vested dual benefits and supplemental annuity benefits are fully taxable. See Taxation of Periodic Payments, later, for information on how to report your benefits and how to recover the employee contributions tax free.

Nonresident aliens. Form RRB-1099-R is used for U.S. citizens, resident aliens, and nonresident aliens. If you are a nonresident alien and your tax withholding rate changed or your country of legal residence changed during the year, you may receive more than one Form RRB-1099-R. To determine your total benefits paid or repaid and total tax withheld for the year, you should add the amounts shown on all Forms RRB-1099-R you received for that year. For information on filing requirements for aliens, see Publication 519, U.S. Tax Guide for Aliens. For information on tax treaties between the United States and other countries that may reduce or eliminate U.S. tax on your benefits, see Publication 901, U.S. Tax Treaties.

Form RRB-1099-R. The following discussion explains the items shown on Form RRB-1099-R. The amounts shown on this form are before any deduction for:

• Federal income tax withholding,
• Medicare premiums,
• Legal process garnishment payments,
• Legal process assignment payments,
• Recovery of a prior year overpayment of an NSSEB, tier 2 benefit, VDB, or supplemental annuity benefit, and
• Recovery of Railroad Unemployment Insurance Act benefits received while awaiting payment of your railroad retirement annuity.

The amounts shown on this form are after any offset for:

• Work deductions,
• Legal process partition payments,
• Actuarial adjustment,
• Annuity waiver, or
• Recovery of a current-year overpayment of NSSEB, tier 2, VDB, or supplemental annuity benefits.

The amounts shown on Form RRB-1099-R do not reflect any special rules, such as capital gain treatment or the special 10-year tax option for lump-sum payments, or tax-free rollovers. To determine if any of these rules apply to your benefits, see the discussions about them later.

There are three copies of this form. Copy B is to be included with your income tax return. Copy C is for your own records. Copy 2 is filed with your state, city, or local income tax return, when required. See the illustrated Copy B (Form RRB-1099-R) on the next page.

Each beneficiary will receive his or her own Form RRB-1099-R. If you receive benefits on more than one railroad retirement record, you may get more than one Form RRB-1099-R. So that you get your form timely, make sure the RRB always has your current mailing address.

Form RRB-1099-R

Box 1--Claim Number and Payee Code. Your claim number is a six- or nine-digit number preceded by an alphabetical prefix. This is the number under which the U.S. Railroad Retirement Board (RRB) paid your benefits. Your payee code follows your claim number and is the last number in this box. It is used by the RRB to identify you under your claim number. In all your correspondence with the RRB, be sure to use the claim number and payee code shown in this box.

Box 2--Recipient's Identification Number. This is the social security number (SSN), individual taxpayer identification number (ITIN), or employer identification number (EIN), if known, for the person or estate listed as the recipient.

If you are a resident or nonresident alien who must furnish a taxpayer identification number to the IRS and are not eligible to obtain an SSN, use Form W-7, Application for IRS Individual Taxpayer Identification Number, to apply for an ITIN. The instructions for Form W-7 explain how and when to apply.

Box 3--Employee Contributions. This is the amount of taxes withheld from the railroad employee's earnings that exceeds the amount of taxes that would have been withheld had the earnings been covered under the social security system. This amount is the employee's cost (investment in the contract) that you use to figure the tax-free part of the NSSEB and tier 2 benefit you received (the amount shown in box 4). (For information on how to figure the tax-free part, see Partly Taxable Payments under Taxation of Periodic Payments, later.) The amount shown is the total employee contributions, not reduced by any amounts that the RRB calculated as previously recovered. It is the latest amount reported for 2001 and may have increased or decreased from a previous Form RRB-1099-R. If this amount has changed, you may need to refigure the tax-free part of your NSSEB/tier 2 benefit. If this box is blank, it means that the amount of your NSSEB and tier 2 payments shown in box 4 is fully taxable.

If you had a previous annuity entitlement that ended and you are figuring the tax-free part of your NSSEB/tier 2 benefit for your current annuity entitlement, you should contact the RRB for confirmation of your correct employee contributions amount.

Box 4--Contributory Amount Paid. This is the gross amount of NSSEB and tier 2 benefit you received in 2001, less any 2001 benefits you repaid in 2001. (Any benefits you repaid in 2001 for an earlier year or for an unknown year are shown in box 8.) This amount is the total contributory pension paid in 2001 and is usually partly taxable and partly tax free. You figure the tax-free part as explained in Partly Taxable Payments under Taxation of Periodic Payments, later, using the latest reported amount of employee contributions shown in box 3 as the cost (investment in the contract).

Box 5--Vested Dual Benefit. This is the gross amount of vested dual benefit (VDB) payments paid in 2001, less any 2001 VDB payments you repaid in 2001. It is fully taxable. VDB payments you repaid in 2001 for an earlier year or for an unknown year are shown in box 8.

Note. The amounts shown in boxes 4 and 5 may represent payments for 2001 and/or other years after 1983.

Box 6--Supplemental Annuity. This is the gross amount of supplemental annuity benefits paid in 2001, less any 2001 supplemental annuity benefits you repaid in 2001. It is fully taxable. Supplemental annuity benefits you repaid in 2001 for an earlier year or for an unknown year are shown in box 8.

Box 7--Total Gross Paid. This is the sum of boxes 4, 5, and 6. The amount represents the total pension paid in 2001. Include this amount on line 16a of your Form 1040, line 12a of your Form 1040A, or line 17a of your Form 1040NR.

Box 8--Repayments. This amount represents any NSSEB, tier 2 benefit, VDB, and supplemental annuity benefit you repaid to the RRB in 2001 for years before 2001 or for unknown years. The amount shown in this box has not been deducted from the amounts shown in boxes 4, 5, and 6. It only includes repayments of benefits that were taxable to you. This means it only includes repayments in 2001 of NSSEB benefits paid after 1985, tier 2 and VDB benefits paid after 1983, and supplemental annuity benefits paid in any year. If you included the benefits in your income in the year you received them, you may be able to deduct the repaid amount. For more information about repayments, see Repayment of benefits received in an earlier year, later.

You may have repaid an overpayment of benefits by returning a payment, by making a cash refund, or by having an amount withheld.

Box 9--Federal Income Tax Withheld. This is the total federal income tax withheld from your NSSEB, tier 2 benefit, VDB, and supplemental annuity benefit. Include this on your income tax return as tax withheld. If you are a nonresident alien and your tax withholding rate and/or country of legal residence changed during 2001, you will receive more than one Form RRB-1099-R for 2001. Therefore, add the amounts in box 9 of all Forms RRB-1099-R you receive for 2001 to determine your total amount of U.S. federal income tax withheld for 2001.

Box 10--Rate of Tax. If you are taxed as a U.S. citizen or resident alien, this box does not apply to you. If you are a nonresident alien, an entry in this box indicates the rate at which tax was withheld on the NSSEB, tier 2, VDB, and supplemental annuity payments that were paid to you in 2001. If you are a nonresident alien whose tax was withheld at more than one rate during 2001, you will receive a separate Form RRB-1099-R for each rate change during 2001.

Box 11--Country. If you are taxed as a U.S. citizen or resident alien, this box does not apply to you. If you are a nonresident alien, an entry in this box indicates the country of which you were a resident for tax purposes at the time you received railroad retirement payments in 2001. If you are a nonresident alien who was a resident of more than one country during 2001, you will receive a separate Form RRB-1099-R for each country of residence during 2001.

Box 12--Medicare Premium Total. This is for information purposes only. The amount shown in this box represents the total amount of Part B Medicare premiums deducted from your railroad retirement annuity payments in 2001. Medicare premium refunds are not included in the Medicare total. The Medicare total is normally shown on Form RRB-1099 (if you are a citizen or resident of the United States) or Form RRB-1042S (if you are a nonresident alien). However, if Form RRB-1099 or Form RRB-1042S is not required for 2001, then this total will be shown on Form RRB-1099-R. If your Medicare premiums were deducted from your social security benefits, paid by a third party, and/or you paid the premiums by direct billing, your Medicare total will not be shown in this box.

Help from the RRB. For assistance with questions about your Form RRB-1099-R, you should contact your nearest RRB field office (if you reside in the United States) or U.S. consulate/embassy (if you reside outside the United States). You may visit the RRB on the Internet at www.rrb.gov.

Repayment of benefits received in an earlier year. If you had to repay any railroad retirement benefits that you had included in your income in an earlier year because at that time you thought you had an unrestricted right to it, you can deduct the amount you repaid in the year in which you repaid it.

If you repaid $3,000 or less, deduct it on line 22 of Schedule A (Form 1040). The 2%-of-adjusted-gross-income limit applies to this deduction. You cannot take this deduction if you file Form 1040A.

If you repaid more than $3,000, you can either take a deduction for the amount repaid on line 27 of Schedule A (Form 1040) or you can take a credit against your tax. For more information, see Repayments in Publication 525.

Withholding Tax and Estimated Tax

Your retirement plan distributions are subject to federal income tax withholding. However, you can choose not to have tax withheld on payments you receive unless they are eligible rollover distributions. If you choose not to have tax withheld or if you do not have enough tax withheld, you may have to make estimated tax payments. See Estimated tax, later.

The withholding rules apply to the taxable part of payments you receive from:

• An employer pension, annuity, profit-sharing, or stock bonus plan,
• Any other deferred compensation plan,
• A traditional individual retirement arrangement (IRA), or
• A commercial annuity.

For this purpose, a commercial annuity means an annuity, endowment, or life insurance contract issued by an insurance company.

There will be no withholding on any part of a distribution that (it is reasonable to believe) will not be includible in gross income.

These withholding rules also apply to disability pension distributions received before your minimum retirement age. See Disability Retirement, earlier.

Choosing no withholding. You can choose not to have income tax withheld from retirement plan payments unless they are eligible rollover distributions. This applies to periodic and nonperiodic payments. The payer will tell you how to make the choice. This choice generally remains in effect until you revoke it.

The payer will ignore your choice not to have tax withheld if:

1. You do not give the payer your social security number (in the required manner), or
2. The IRS notifies the payer, before the payment is made, that you gave an incorrect social security number.

To choose not to have tax withheld, a U.S. citizen or resident must give the payer a home address in, and have the check delivered to an address in, the United States or its possessions. Without that address, the payer must withhold tax. For example, the payer has to withhold tax if the recipient has provided a U.S. address for a nominee, trustee, or agent to whom the benefits are delivered, but has not provided his or her own U.S. home address.

If you do not give the payer a home address in the United States or its possessions, you can choose not to have tax withheld only if you certify to the payer that you are not a U.S. citizen, a U.S. resident alien, or someone who left the country to avoid tax. But if you so certify, you may be subject to the 30% flat rate withholding that applies to nonresident aliens. This 30% rate will not apply if you are exempt or subject to a reduced rate by treaty. For details, get Publication 519.

Periodic payments. Unless you choose no withholding, your annuity or similar periodic payments (other than eligible rollover distributions) will be treated like wages for withholding purposes. Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). You should give the payer a completed withholding certificate ( Form W-4P or a similar form provided by the payer). If you do not, tax will be withheld as if you were married and claiming three withholding allowances.

Tax will be withheld as if you were single and were claiming no withholding allowances if:

1. You do not give the payer your social security number (in the required manner), or
2. The IRS notifies the payer (before any payment is made) that you gave an incorrect social security number.

You must file a new withholding certificate to change the amount of withholding.

Nonperiodic distributions. For a nonperiodic distribution (a payment other than a periodic payment) that is not an eligible rollover distribution, the withholding is 10% of the distribution, unless you choose not to have tax withheld. You can use Form W-4P to elect to have no income tax withheld. You can also ask the payer to withhold an additional amount using Form W-4P. The part of any loan treated as a distribution (except an offset amount to repay the loan), explained later, is subject to withholding under this rule.

Eligible rollover distributions. In general, an eligible rollover distribution is any distribution of all or any part of the balance to your credit in a qualified retirement plan except:

• The nontaxable part of a distribution,
• A hardship distribution,
• A required minimum distribution (described under Tax on Excess Accumulation, later), or
• Any of a series of substantially equal distributions paid at least once a year over your lifetime or life expectancy (or the lifetimes or life expectancies of you and your beneficiary), or over a period of 10 years or more.

See Rollovers, later, for additional exceptions.

You may be able to roll over the nontaxable part of a distribution (such as your after-tax contributions) made after 2001 to another qualified retirement plan or traditional IRA. The transfer must be made either through a direct rollover to a qualified plan that separately accounts for the taxable and nontaxable parts of the rollover or through a rollover to an IRA.

Withholding. If you receive an eligible rollover distribution, 20% of it will generally be withheld for income tax. You cannot choose not to have tax withheld from an eligible rollover distribution. However, tax will not be withheld if you have the plan administrator pay the eligible rollover distribution directly to another qualified plan or an IRA in a direct rollover. See Rollovers, later, for more information.

Estimated tax. Your estimated tax is the total of your expected income tax, self-employment tax, and certain other taxes for the year, minus your expected credits and withheld tax. Generally, you must make estimated tax payments for 2002 if your estimated tax, as defined above, is $1,000 or more and you estimate that the total amount of income tax to be withheld will be less than the smaller of:

1. 90% of the tax to be shown on your 2002 return, or
2. 100% of the tax shown on your 2001 return.

If your adjusted gross income for 2001 was more than $150,000 ($75,000 if your filing status for 2002 is married filing separately), substitute 112% for 100% in (2) above. For more information, get Publication 505, Tax Withholding and Estimated Tax.

In figuring your withholding or estimated tax, remember that a part of your monthly social security or equivalent tier 1 railroad retirement benefits may be taxable. See Publication 915. You can choose to have income tax withheld from those benefits. Use Form W-4V, Voluntary Withholding Request, to make this choice.

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