Retirement Income and Annuity Tax

Editor’s Note: Want to learn more about retirement taxes? Taxes on retirement income, pensions, and annuities can get complicated, but we’re here to help! Read on to gain more guidance on taxes for retirees and those claiming retirement income.

Taxes for Retirees

Taxes for retirees are primary from distributions taken from your retirement plan. The following are fully taxable:

• All contributions your company made into your retirement plan
• Pre-tax contributions — like to a 401(k) plan — you made. They’re taxable since you didn’t pay taxes on your contributions when you made them.

After-tax contributions – like to a Roth 401(k) or Roth IRA – you made into a retirement plan are tax-free upon distribution. This is true since you paid taxes on the contributions when you made them.

Calculating Retirement Taxes from Annuities

If you are receiving a distribution from an annuity, you may use one of these several methods for figuring the taxable part of your distribution. The method used depends on the year you start receiving your retirement. You can use either the simplified method or the general method when part of the annuity distribution is taxable, and the other part is tax free.

1 – Simplified method

The simplified method allows you to figure the tax-free part of each annuity payment. If you made some after-tax contributions, divide your cost by the total number of monthly payments you’re anticipating. For an annuity not payable for life, is the number of monthly annuity payments under the contract.

You must use the simplified method if your pension or annuity meets all of these:

• The annuity payments must start after November 18, 1996.
• The payments must be from one of these:
  • Qualified employee plan
  • Qualified employee annuity
  • Tax-sheltered annuity plan (403(b) plan)
• The annuitant must be under age 75 when the payments begin. If age 75 or older, the guaranteed payments must last fewer than five years.

For an annuity payable for life using the simplified method, it’s based on the age you started receiving the annuity. It’s figured from this table and the worksheet in Pub. 575:

Use Table 1 for single life payments and Table 2 for joint life payments

After you recover your after-tax contributions, you can’t exclude any other payments from tax. The rules differ for those who die before recovering all contributions. In that case, the person doing the deceased’s taxes can deduct the remaining contributions on the final return.

2 – General rule

You must use the general rule if your pension or annuity meets all of these:

• The annuity payments must start after November 18, 1996. If they start before, different rules may apply.
• The payment must be from nonqualified plan such as one of these:
  • Private annuity
  • Purchased commercial annuity
  • Nonqualified employee plan
• The annuitant must be age 75 or older when the payments begin, and the payments must last longer than five years.

With this method, you figure the taxable and tax-free portions of your annuity payments using life expectancy tables from by the IRS. For more information and copies of the tables, refer to Publication 939, General Rule for Pensions and Annuities.

More Help with Retirement Taxes

Whether you make an appointment with one of our knowledgeable tax pros or choose one of our online tax filing products, you can count on H&R Block to help you get back the most money possible.