Do I Have to Report My Pension Distribution As Taxable?
Retired workers who receive pension payments may have to pay federal income tax on their distributions. The amount of tax they owe depends on the type of pension plan they participate in, when they make a withdrawal, and the way the funds were taxed at the time of contribution. Those who take an early pension distribution might pay additional penalties as well as income tax.
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Pension Distributions
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The total amount of pension payments a retiree receives during a year is referred to as a "pension distribution." Retired taxpayers who collect pensions also receive a form 1099-R from their plan administrators at the end of each calendar year. The 1099-R explains the total pension payments and the portion of the distribution that is subject to federal income tax.
Tax Treatment
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Pension payments are generally taxable as income. Most pension plans allow employees to make tax-deferred contributions during their working years. In these cases, workers are able to avoid paying income tax on these funds at the time of contribution. However, when they receive these funds as a pension distribution, they must pay federal income tax. Some pension plans withhold federal income tax from distributions before issuing them to recipients.
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Possible Penalties
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Those who take a pension distribution before they reach the plan's specified retirement age may have to pay an early withdrawal penalty on the funds they receive. The IRS imposes a 10 percent early withdrawal penalty on these distributions, along with the appropriate amount of income tax.
Reporting Pension Distributions on a Tax Return
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Since pension distributions are generally taxable as income, taxpayers should include them in the "Income" section of form 1040. The IRS designates line 16a of the form for pension and annuity payments and line 16b for the taxable amount. Individuals should use the information on form 1099-R to enter the correct totals on these lines.
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References
- IRS.gov: Tax Topics - Topic 410 -- Pensions and Annuities
- IRS.gov: Pensions and Annuity Withholding
- IRS.gov: Publication 575 -- Pension and Annuity Income
- IRS.gov: Tax Topics -- Topic 558 -- Tax on Early Distributions from Retirement Plans, Other Than IRAs
- IRS.gov: Form 1040 (2010) -- U.S. Individual Income Tax Return
