Pensions & Annuities

Income tax usually will be withheld from your pension or annuity distributions unless you choose not to have it withheld. This rule applies to distributions from:

• Certain individual retirement arrangements (IRAs),
• A life insurance company under an endowment, annuity, or life insurance contract,
• A pension, annuity, or profit-sharing plan,
• A stock bonus plan, and
• Any other plan that defers the time you receive compensation.

The amount withheld depends on whether you receive payments spread out over more than one year (periodic payments), within one year (nonperiodic payments), or as an eligible rollover distribution (ERD).

You cannot choose not to have income tax withheld from an ERD. ERDs are discussed later.

Nontaxable part. A part of your pension or annuity may not be taxable. This is the part that is a return of your investment in your retirement plan -- the amount you paid into the plan or its cost to you. Income tax will not be withheld from the part of your pension or annuity that is not taxable. The tax withheld will be figured on, and cannot be more than, the taxable part.

For information about figuring the part of your pension or annuity that is not taxable, see Publication 575, Pension and Annuity Income.

Periodic Payments

Withholding from periodic payments of a pension or annuity is figured in the same way as withholding from salaries and wages. To tell the payer of your pension or annuity how much you want withheld, fill out Form W-4P or a similar form provided by the payer. Follow the rules discussed under Salaries and Wages, earlier, to fill out your Form W-4P.

The withholding rules for pensions and annuities differ from those for salaries and wages in the following four ways.

1. If you do not fill out a withholding certificate, tax will be withheld as if you were married and claiming three withholding allowances. This means that tax will be withheld only if your pension or annuity is at least $1,280 a month (or $15,360 a year).
2. You can choose not to have tax withheld, regardless of how much tax you owed last year or expect to owe this year. You do not have to qualify for exemption. See Choosing Not To Have Income Tax Withheld, later.
3. If you do not give the payer your social security number (in the required manner) or the IRS notifies the payer before any payment or distribution is made that you gave it an incorrect social security number, tax will be withheld as if you were single and were claiming no withholding allowances.

Military retirement pay. This generally is treated in the same manner as wages and not as a pension or annuity for income tax withholding purposes. Military retirees should use Form W-4, not Form W-4P.

Effective date of withholding certificate. If you give your withholding certificate ( Form W-4P or a similar form) to the payer by the time your payments start, it will be put into effect by the first payment made more than 30 days after you submit the certificate.

If you give the payer your certificate after your payments start, it will be put into effect with the first payment made on or after January 1, May 1, July 1, or October 1, whichever is at least 30 days after you submit it. However, the payer can elect to put it into effect earlier.

Nonperiodic Payments

Tax will be withheld at a 10% rate on any nonperiodic payments you receive.

Because withholding on nonperiodic payments does not depend on withholding allowances or whether you are married or single, you cannot use Form W-4P to tell the payer how much to withhold. But you can use Form W-4P to specify that an additional amount be withheld. You can also use Form W-4P to choose not to have tax withheld or to revoke a choice not to have tax withheld.

The 10% rate of withholding on nonperiodic payments is less than the lowest tax rate (15%). You may need to use Form W-4P to ask for additional withholding. If you do not have enough tax withheld, you may need to make estimated tax payments, as explained in chapter 2.

Eligible Rollover Distributions

Distributions you receive that are eligible to be rolled over tax free into qualified retirement or annuity plans are subject to a 20% withholding tax.

This type of distribution is called an eligible rollover distribution (ERD). This is any distribution from a qualified pension plan or tax-sheltered annuity that is not either:

1. A minimum required distribution, or
2. One of a series of substantially equal periodic pension or annuity payments made over:
   1. Your life (or your life expectancy) or the joint lives of you and your beneficiary (or your life expectancies), or
   2. A specified period of 10 or more years.

The withholding rules for non-ERD distributions are discussed earlier under Periodic Payments and Nonperiodic Payments.

A distribution is subject to withholding if it is not substantially equal to the periodic payments.

For example, upon retirement you receive 30% of your accrued pension benefits in the form of a single-sum distribution with the balance payable in annuity form. The 30% distribution is an ERD subject to 20% withholding. The annuity payments are periodic payments. Tax will be withheld from the annuity payments only if you choose.

The payer of a distribution must withhold at a 20% rate on any part of an ERD that is not rolled over directly to another qualified plan. You cannot elect not to have withholding on these distributions.

If tax is withheld on the ERD, it will be withheld only on the taxable part. You must either:

1. Contribute to the new plan (within 60 days from the date of the distribution) an amount equal to the taxable part of the total ERD, including the amount withheld, or
2. Include in your income for the year of the distribution any amount withheld for which you did not make a matching contribution to the new plan.

The matching contribution to cover the withheld amount must be in addition to the rollover of all the taxable part that you actually received.

Therefore, if the amount you actually received is less than the taxable part of the ERD and you do not both:

1. Roll over the entire amount received, and
2. Also contribute to the new plan an amount sufficient to bring the total of the rollover plus the additional amount contributed up to an amount equal to that taxable part,

you must include any difference in your income.

If the amount you actually received is more than the taxable part of the total ERD, you cannot roll over more than the taxable part. If you roll over an amount equal to the taxable part, you do not have to include any of the amount withheld in your income. If you roll over less than the taxable part, you must include in your income the difference between the amount you roll over and the taxable part.

Exception to withholding rule. The only way to avoid withholding on an ERD is to have it directly rolled over from the employer's plan to a qualified plan or IRA. This direct rollover is made only at your direction. You must first make sure that the receiving trustee agrees to accept a direct rollover. The transferor trustee must allow you to make such a rollover and provide to you, within a reasonable period of time, written instructions on how to do so. You must also follow spousal consent and other participant and beneficiary protection rules.

More information. For more information on taxation of annuities and distributions from qualified retirement plans, see Publication 575. For information on IRAs, see Publication 590, Individual Retirement Arrangements (IRAs).

Choosing Not To Have Income Tax Withheld

You can choose not to have income tax withheld from your pension or annuity, whether the payments are periodic or nonperiodic. This rule does not apply to eligible rollover distributions. The payer will tell you how to make this choice. If you use Form W-4P, check the box on line 1 to make this choice. This choice will remain in effect until you decide you want withholding.

The payer will withhold if either of the following applies:

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 or distribution is made, that you gave it an incorrect social security number.

If you do not have any income tax withheld from your pension or annuity, or if you do not have enough withheld, you may have to make estimated tax payments. See chapter 2.

If you do not pay enough tax either through estimated tax or withholding, you may have to pay a penalty. See chapter 4 for information about this penalty.

Outside the United States. If you are a U.S. citizen or resident alien and you do not want to have tax withheld from pension or annuity benefits, you must give the payer of the benefits a home address in the United States or in a U.S. possession. Otherwise, the payer must withhold tax. For example, the payer would have to withhold tax if you provide a U.S. address for a nominee, trustee, or agent to whom the benefits are to be delivered, but do not provide your own home address in the United States or in a U.S. possession.

Revoking a choice not to have tax withheld. If you want to revoke your choice not to have tax withheld, the payer of your pension or annuity will tell you how. If the payer gives you Form W-4P, print "Revoked" by the checkbox on line 1 of the form.

If you get periodic payments and do not complete the rest of the form, the payer will withhold tax as if you were married and claiming three allowances. If you want tax withheld at a different rate, you must complete the rest of the form.

Notice required of payer. The payer of your pension or annuity must send you a notice telling you about your right to choose not to have tax withheld.

Generally, the payer will not send a notice to you if it is reasonable to believe that the entire amount you will be paid is not taxable.

Previous| First | Next

Publication Index | IRS-Forms Main | Home