OLT TAX CORNER ~ 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.

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 years.

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.

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.

The taxable part of your pension or annuity payments is generally subject to federal income tax withholding.

Yes, you need to include as income the total amount of your 401(k) distribution reported on Form 1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. In addition, if you took the distribution before age 59 1/2, you may need to pay a 10% additional tax on early distributions from qualified retirement plans unless you meet one of the exceptions in Publication 575, Pension and Annuity Income. You will include the federal income tax withheld on the appropriate line of your federal tax return along with any other federal income tax.

You may be able to elect optional methods of figuring the tax on lump-sum distributions you received from a qualified retirement plan. A lump-sum distribution is the distribution or payment, within a single tax year, of an employee's entire balance from the employer's entire qualified pension, profit-sharing, or stock bonus plans. The distribution must have been made under specific conditions. For details, refer to IRS Tax Topic 412 which discusses Lump-Sum Distributions or IRS Publication 575, Pension and Annuity Income.

If you are under the age of 59 1/2, you cannot withdraw funds from your 401(k) plan to purchase your first home without being subject to a 10% additional tax on early distributions from qualified retirement plans. However, depending on the rules for your 401(k) plan, you may be able to borrow money from your 401(k) plan to purchase your first home. Your plan administrator should have written information about your particular plan that explains when you can borrow funds from your 401(k) plan as well as other plan rules.