|Tax Topic #410
||2008 Tax Year
Topic 410 - Pensions and Annuities
If you receive retirement benefits in the form of pension or annuity payments
from a qualified employer retirement plan, the amounts you receive may be
fully taxable, or partially taxable.
Social security and equivalent railroad retirement benefits are not discussed
here. For more information about these benefits, refer to Topic 423.
Your pension or annuity payments are usually fully taxable if your employer
contributed all of the cost without including the cost in your taxable wages,
or if you got back all your previously taxed contributions tax free in previous
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 cost in the plan or investment, and includes the amounts your employer
contributed that were taxable to you when contributed. Partly taxable pensions
are taxed under 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 payments is taxable and how much is tax free.
If you receive pension or annuity payments before age 59 1/2, you may be
subject to an additional 10% tax on early distributions. However, this additional
tax will not apply if the payments are made after your separation from service
in or after the year you reached age 55, or if the payments are part of a
series of substantially equal payments that are paid over your life. For other
exceptions to the tax, refer to Publication 575, Pension and Annuity
The taxable part of your pension or annuity payments is generally subject
to federal income tax withholding.
You may choose not to have income tax withheld from your pension or annuity
payments (unless they are eligible rollover distributions) or want to specify
how tax is withheld. If so, provide the payer Form W-4P (PDF), Withholding Certificate for Pension or Annuity Payments,
or a similar form provided by the payer. Withholding from periodic payments
of a pension or annuity is generally figured 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.
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 too little tax is withheld you may refer to Publication 505, Tax
Withholding and Estimated Tax., for additional information.
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 an eligible rollover distribution
is paid to you, the payer must withhold 20% of it, unless you choose the direct
rollover option. For more information refer to Topic 413.
Page Last Reviewed or Updated: December 22, 2008
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