What this line means
The taxable portion of your pension and annuity distributions. If your employer made all the contributions (common with defined-benefit pensions), the entire distribution is taxable. If you made after-tax contributions, part of each payment is a tax-free return of your investment — calculated using the Simplified Method in IRS Publication 575.
Does this apply to you?
- You receive pension payments from an employer-funded defined-benefit plan
- You took distributions from a 401(k) or 403(b) where all contributions were pre-tax
- You receive annuity payments and made after-tax contributions to the contract
- You took a partial or full lump-sum distribution from a retirement plan
- You completed a rollover but part of the distribution was not rolled over
Easy to overlook
After-tax contributions reduce the taxable portion If you contributed after-tax dollars to your employer plan or annuity, a portion of each distribution is a tax-free return of those contributions. The Simplified Method divides your total after-tax contributions by the number of expected monthly payments (based on your age at the annuity starting date) to determine the tax-free portion of each payment. 1 IRS Publication 575 — Pension and Annuity Income
The Simplified Method calculation changes at the recovery point Once you have recovered all your after-tax contributions (total tax-free portions equal your original after-tax investment), every subsequent payment is fully taxable. Retirees who have been receiving pension payments for many years sometimes continue claiming a partial exclusion past the recovery point, overstating the tax-free portion. 2 General filing pattern — Simplified Method miscalculation
Watch out for this
Assuming Box 2a on the 1099-R is always correct for the taxable amount. Box 2a sometimes shows the gross amount or is left blank with Box 2b (“taxable amount not determined”) checked. When Box 2b is checked, you must calculate the taxable amount yourself using the Simplified Method or General Rule in Publication 575.
Footnotes
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IRS Publication 575, Pension and Annuity Income, Simplified Method. https://www.irs.gov/pub/irs-pdf/p575.pdf ↩
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IRS Publication 575, Pension and Annuity Income, Recovery of Cost. https://www.irs.gov/pub/irs-pdf/p575.pdf ↩