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  • tara berks
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    Tax Topic 410

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    Topic 410 – Pensions and Annuities
    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 doesn’t cover the taxation of social security and equivalent railroad retirement benefits. For information about tax on those benefits, refer to Topic 423 and Are My Social Security or Railroad Retirement Tier I Benefits Taxable?

    The pension or annuity payments that you receive are fully taxable if you have no investment in the contract (sometimes referred to as “cost” or “basis”) due to any of the following situations:

    You didn’t contribute anything or aren’t considered to have contributed anything for your pension or annuity
    Your employer didn’t withhold contributions from your salary, or
    You received all of your contributions (your investment in the contract) tax-free in prior years
    If you contributed after-tax dollars to your pension or annuity, your pension payments are partially taxable. You won’t 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 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 doesn’t apply to any part of a distribution that’s tax-free or to any of the following types of distributions:

    Distributions made as a part of a series of substantially equal periodic payments that begins after your separation from service
    Distributions made because you’re totally and permanently disabled
    Distributions made on or after the death of the plan participant or contract holder, and
    Distributions made after your separation from service and in or after the year you reached age 55
    For other exceptions to the additional 10% tax, refer to Publication 575, Pension and Annuity Income.

    If you’re 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’re eligible rollover distributions) or may want to specify how much 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 along with your social security number (SSN). If you’re a U.S. citizen or resident alien, you must provide the payer with a home address in the United States (or its possessions) to be able to 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 don’t submit the Form W-4P 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 (PDF) and elect a lower amount, if you don’t provide the payer with your correct SSN, the 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 isn’t enough, you may also need to make estimated tax payments to ensure you don’t 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 nonperiodic payments from qualified retirement plans. For information on the special tax treatment of lump-sum distributions, refer to 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 isn’t subject to withholding. For more information on rollovers, refer to Topic 413 and visit Do I Need to Report the Transfer or Rollover of an IRA or Retirement Plan on My Tax Return?

    For more information, refer to Publication 575 and Is My Pension or Annuity Payment Taxable?

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