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, see Topic 423.

Your pension or annuity payments are 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 years. Publication 17, Your Federal Income Tax, provides more information in Chapter 11, Retirement Plans, Pensions, and Annuities.

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 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. If the starting date of your pension annuity payments is after November 18, 1996, you generally must use the Simplified Method to determine how much of your annuity payments are taxable and how much are tax free. To figure how much of your pension or annuity income is taxable, see Topic 411.

If you retired before age 55, your pension or annuity payments may be subject to an additional 10% tax on early distributions. However, this additional tax will not apply if the payments are made as 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 Income.

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. If you do not want tax withheld from your pension or annuity, or if you want to specify how tax is to be withheld, you should give the payer Form W-4P, 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 give a completed withholding certificate to the payer, the payer must withhold tax as if you were married and claiming three withholding allowances. If you do not give the payer your correct social security number, tax will be withheld as if you were single and claiming no withholding allowances.

Special rules apply to nonperiodic payments from qualified retirement plans received under a pension or annuity plan. For information on the special tax treatment of lump-sum distributions, see Topic 412.

If too little tax is withheld, you may be required to make estimated tax payments. Refer to Topic 355 for information on estimated tax, or Publication 505, Tax Withholding and Estimated Tax.

If an eligible rollover distribution is paid to you, the payer must withhold 20% of it, unless you choose the direct rollover option. For information on the treatment of eligible rollover distributions, see Topic 413.

For more inform see Publication 939, General Rule for Pensions and Annuities, General Information, or the interactive Tax Trail on Pension and Annuity Income. Publications and forms may be downloaded from this site or ordered by calling 1-800-829-3676.

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