Publication 575 - Pension And Annuity Income - 2002 Page 4
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34than one program, you may have to treat each as a sepa-
ance of those investments. The earnings are not taxed
rate contract, depending upon the facts in each case. Also,
until distributed either in a withdrawal or in annuity pay-
you may be considered to have received more than one
ments. The taxable part of a distribution is treated as
pension or annuity. Your former employer or the plan
ordinary income.
administrator should be able to tell you if you have more
For information on the tax treatment of a transfer or
than one pension or annuity contract.
exchange of a variable annuity contract, see Transfers of
Annuity Contracts under Taxation of Nonperiodic Pay-
Example. Your employer set up a noncontributory
ments, later.
profit-sharing plan for its employees. The plan provides
that the amount held in the account of each participant will
Withdrawals. If you withdraw funds before your annuity
be paid when that participant retires. Your employer also
starting date and your annuity is under a qualified retire-
set up a contributory defined benefit pension plan for its
ment plan, a ratable part of the amount withdrawn is tax
employees providing for the payment of a lifetime pension
free. The tax-free part is based on the ratio of your cost
to each participant after retirement.
(investment in the contract) to your account balance under
The amount of any distribution from the profit-sharing
the plan.
plan depends on the contributions (including allocated
If your annuity is under a nonqualified plan (including a
forfeitures) made for the participant and the earnings from
contract you bought directly from the issuer), the amount
those contributions. Under the pension plan, however, a
withdrawn is allocated first to earnings (the taxable part)
formula determines the amount of the pension benefits.
and then to your cost (the tax-free part). However, if you
The amount of contributions is the amount necessary to
bought your annuity contract before August 14, 1982, a
provide that pension.
different allocation applies to the investment before that
Each plan is a separate program and a separate con-
date and the earnings on that investment. To the extent the
tract. If you get benefits from these plans, you must ac-
amount withdrawn does not exceed that investment and
count for each separately, even though the benefits from
earnings, it is allocated first to your cost (the tax-free part)
both may be included in the same check.
and then to earnings (the taxable part).
If you withdraw funds (other than as an annuity) on or
Qualified domestic relations order (QDRO). A spouse
after your annuity starting date, the entire amount with-
or former spouse who receives part of the benefits from a
drawn is generally taxable.
retirement plan under a QDRO reports the payments re-
The amount you receive in a full surrender of your
ceived as if he or she were a plan participant. The spouse
annuity contract at any time is tax free to the extent of any
or former spouse is allocated a share of the participant’s
cost that you have not previously recovered tax free. The
cost (investment in the contract) equal to the cost times a
rest is taxable.
fraction. The numerator (top part) of the fraction is the
For more information on the tax treatment of withdraw-
present value of the benefits payable to the spouse or
als, see Taxation of Nonperiodic Payments, later. If you
former spouse. The denominator (bottom part) is the pres-
withdraw funds from your annuity before you reach age
ent value of all benefits payable to the participant.
59
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/
, also see Tax on Early Distributions under Special
2
A distribution that is paid to a child or other dependent
Additional Taxes, later.
under a QDRO is taxed to the plan participant.
What is a QDRO? A QDRO is a judgment, decree, or
Annuity payments. If you receive annuity payments
order relating to payment of child support, alimony, or
under a variable annuity plan or contract, you recover your
marital property rights to a spouse, former spouse, child, or
cost tax free under either the Simplified Method or the
other dependent. The QDRO must contain certain specific
General Rule, as explained under Taxation of Periodic
information, such as the name and last known mailing
Payments, later. For a variable annuity paid under a quali-
address of the participant and each alternate payee, and
fied plan, you generally must use the Simplified Method.
the amount or percentage of the participant’s benefits to be
For a variable annuity paid under a nonqualified plan
paid to each alternate payee. A QDRO may not award an
(including a contract you bought directly from the issuer),
amount or form of benefit that is not available under the
you must use a special computation under the General
plan.
Rule. For more information, see Variable annuities in Pub-
lication 939 under Computation Under the General Rule.
Variable Annuities
Death benefits. If you receive a single-sum distribution
The tax rules in this publication apply both to annuities that
from a variable annuity contract because of the death of
provide fixed payments and to annuities that provide pay-
the owner or annuitant, the distribution is generally taxable
ments that vary in amount based on investment results or
only to the extent it is more than the unrecovered cost of
other factors. For example, they apply to commercial varia-
the contract. If you choose to receive an annuity, the
ble annuity contracts, whether bought by an employee
payments are subject to tax as described above. If the
retirement plan for its participants or bought directly from
contract provides a joint and survivor annuity and the
the issuer by an individual investor. Under these contracts,
primary annuitant had received annuity payments before
the owner can generally allocate the purchase payments
death, you figure the tax-free part of annuity payments you
among several types of investment portfolios or mutual
receive as the survivor in the same way the primary annui-
funds and the contract value is determined by the perform-
tant did. See Survivors and Beneficiaries, later.
Page 4
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