Publication 554 - Older Americans' Tax Guide - 2004 Page 6
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3170
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. See When Must I Withdraw IRA Assets? (Required
later of the annuity starting date or the date on which you
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2
Distributions) in Publication 590. If distributions from your
received your first payment.
traditional IRA(s) are less than the required minimum distri-
The annuity starting date is the later of the first day of the
bution for the year, you may have to pay a 50% excise tax
first period for which you received a payment from the plan
for that year on the amount not distributed as required. See
or the date on which the plan’s obligations became fixed.
Tax on Excess Accumulation, later.
The amount of your contributions to the plan may
TIP
be shown in box 9b of any Form 1099-R, Distribu-
Pensions and Annuities
tions From Pensions, Annuities, Retirement or
Profit-Sharing Plans, IRAs, Insurance Contracts, etc., that
Generally, if you did not pay any part of the cost of your
you receive.
employee pension or annuity, and your employer did not
withhold part of the cost of the contract from your pay while
Foreign employment contributions. If you worked
you worked, the amounts you receive each year are fully
abroad, certain amounts your employer paid into your
taxable.
retirement plan may be considered part of your cost. For
If you have a cost to recover from your pension or
details, see Foreign employment contributions in Publica-
annuity plan (see Cost, later), you can exclude part of each
tion 575.
annuity payment from income as a recovery of your cost.
Withholding. Your pension, profit-sharing, stock bonus,
This tax-free part of the payment is figured when your
annuity, or deferred compensation plan will withhold in-
annuity starts and remains the same each year, even if the
come tax on the taxable part of amounts paid to you.
amount of the payment changes. The rest of each payment
However, you can choose not to have tax withheld on the
is taxable.
payments you receive, unless they are eligible rollover
You figure the tax-free part of the payment using one of
distributions. See Withholding Tax and Estimated Tax and
the following methods.
Rollovers in Publication 575 for more information.
•
Simplified Method. You generally must use this
For payments other than eligible rollover distributions,
method if your annuity is paid under a qualified plan
you can tell the payer how to withhold by filing a Form
(a qualified employee plan, a qualified employee an-
W-4P, Withholding Certificate for Pension or Annuity Pay-
nuity, or a tax-sheltered annuity plan or contract).
ments.
You cannot use this method if your annuity is paid
under a nonqualified plan.
Simplified Method. Under the Simplified Method, you
figure the tax-free part of each annuity payment by dividing
•
General Rule. You must use this method if your
your cost by the total number of anticipated monthly pay-
annuity is paid under a nonqualified plan. You gener-
ments. For an annuity that is payable over the lives of the
ally cannot use this method if your annuity is paid
annuitants, this number is based on the annuitants’ ages
under a qualified plan.
on the annuity starting date and is determined from a table.
For any other annuity, this number is the number of
You determine which method to use when you first begin
monthly annuity payments under the contract.
receiving your annuity, and you continue using it each year
that you recover part of your cost.
Who must use the Simplified Method. You generally
must use the Simplified Method if your annuity starting
Exclusion limit. If you contributed to your pension or
date is after November 18, 1996, and you receive your
annuity and your annuity starting date is before 1987, you
pension or annuity payments from a qualified plan or annu-
can continue to take your monthly exclusion for as long as
ity.
you receive your annuity. The total exclusion may be more
In addition, if your annuity starting date is after July 1,
than your cost.
1986, and before November 19, 1996, you generally could
If your annuity starting date is after 1986, the total
have chosen to use the Simplified Method for payments
amount of annuity income you can exclude over the years
from a qualified plan.
as a recovery of the cost cannot exceed your total cost.
Who cannot use the Simplified Method. You cannot
In either case, any unrecovered cost at your (or the last
use the Simplified Method and must use the General Rule
annuitant’s) death is allowed as a miscellaneous itemized
if you receive pension or annuity payments from:
deduction on the final return of the decedent. This deduc-
•
tion is not subject to the 2%-of-adjusted-gross-income limit
A nonqualified plan, such as a private annuity, a
on miscellaneous deductions.
purchased commercial annuity, or a nonqualified
employee plan, or
Cost. Before you can figure how much, if any, of your
•
pension or annuity benefits is taxable, you must determine
A qualified plan if you are age 75 or older on your
your cost in the plan (your investment). In general, your
annuity starting date and you are entitled to at least
cost is your net investment in the contract as of the annuity
5 years of guaranteed payments (defined later).
starting date. This includes amounts your employer con-
tributed that were taxable to you when paid.
In addition, you must use the General Rule for payments
From this total cost paid or considered paid by you,
from a qualified plan if your annuity starting date is after
subtract any refunded premiums, rebates, dividends, un-
July 1, 1986, and before November 19, 1996, and you did
repaid loans, or other tax-free amounts you received by the
not choose to use the Simplified Method. You also must
Page 6
Chapter 2 Taxable and Nontaxable Income
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