generally remains the same each year, even if the
amount of the payment changes. However, the total amount of your pension or
annuity that you can exclude from income is generally limited to your total
cost.
Pensions – the General Rule and the
Simplified Method
If some contributions to your pension or annuity plan
were previously included in gross income, part of the distributions from the
arrangement will be excluded from income. You must figure the tax-free part
when the payments first begin. The tax-free part generally remains the same
each year, even if the amount of the payment changes. However, the total
amount of your pension or annuity that you can exclude from income is
generally limited to your total cost.
If you begin receiving annuity payments from a
qualified retirement plan after November 18, 1996, generally you use the
Simplified Method to figure the tax-free part of the payments. A qualified
retirement plan is a qualified employee plan, a qualified employee annuity,
or a tax-sheltered annuity plan or contract. If you
began receiving annuity payments from a qualified retirement plan after July
1, 1986 and before November 19, 1996, you generally could have chosen to use
either the Simplified Method or the General Rule to figure the tax-free part
of the payments. If you receive annuity payments from a nonqualified
retirement plan, you must use the General Rule. Under the General Rule, you
figure the taxable and tax-free parts of your annuity payments using life
expectancy tables prescribed by the IRS.
If you began receiving annuity payments from a
qualified retirement plan after July 1, 1986 and before November
19, 1996, you generally could have chosen to use either the
Simplified Method or the General Rule to figure the tax-free
part of the payments. If you receive annuity payments from a
nonqualified retirement plan you must use the general rule. You
must also figure the taxable and tax-free parts of your annuity payments
using life expectancy tables prescribed by the IRS.However,
if you begin receiving annuity payments from a
qualified retirement plan after November 18, 1996, generally you
use the Simplified Method to figure the tax-free part of the payments.
Lump-Sum Distributions
If you receive a lump-sum distribution from a
qualified retirement plan or a qualified retirement annuity and you were
born before January 2, 1936, you may be able to elect optional methods of
figuring the tax on the distribution. These optional methods can be elected
only once after 1986 for any eligible plan participant.A lump-sum distribution is the
distribution or payment, within a single tax year, of a plan participant's
entire balance from all of the employer's qualified plans of one kind
such as pension, profit-sharing, or stock bonus plans. All of the
participant's accounts under the employer's qualified pension,
profit-sharing, or stock bonus plans must be distributed in order to be a
lump-sum distribution. Additionally, a lump-sum distribution is a
distribution that was paid because
of the plan participant's death,after the participant reaches age 59½,because the participant, if an employee,
separates from service, orafter the participant, if a self-employed individual, becomes totally and
permanently disabled.
