If your company made all the contributions into your retirement plan, then distributions that you receive are fully taxable. After-tax contributions that you make into a retirement plan are tax-free upon distribution since you paid taxes on the money when you made the contribution. Pre-tax contributions that you make into a retirement plan (such as a 401(k) plan), are taxable upon distribution since you didn’t pay taxes on the money when you made the contribution.
The IRS has several methods for calculating the taxable portion of your distribution depending upon the year that you started to receive your retirement.
The simplified method allows you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments when you’ve made some after tax contributions. For an annuity that is payable for life, this number is based upon the age that you started receiving the annuity, and is determined from the following table. For any other annuity, this number is the number of monthly annuity payments under the contract.
You can use the simplified method if your pension or annuity payment meets the following requirements:
The payments are for either the annuitant's life or the joint lives of the annuitant and a beneficiary;
The payments must be from a qualified pension, profit-sharing, or stock bonus plan; a qualified employee annuity plan; or a tax-sheltered annuity plan (403(b) plan); and
The annuitant must be under 75 years of age when the payments begin; or, if 75 or older, there must be fewer than 5 years of guaranteed payments.
| Single Life Age at Annuity Start Date | Number of Payments if Your Annuity Start Date Is Before 11/19/1996 |
Number of Payments if Your Annuity Start Date Is After 11/18/1996 |
| 55 or under | 300 | 360 |
| 56 - 60 | 260 | 310 |
| 61 - 65 | 240 | 260 |
| 66 - 70 | 170 | 210 |
| 71 or older | 120 | 169 |
| Joint Life Combined Ages at
Annuity Start Date |
Number of Payments if Your Annuity Start Date Is On or After 11/18/1996 |
| 110 or under | 410 |
| 111 - 120 | 360 |
| 121 - 130 | 310 |
| 131 - 140 | 260 |
| 141 or older | 210 |
Example: You retired in 2006 at age 66, and you made a total of $12,600 after-tax contributions to your single life retirement plan throughout the years. To see how much of each payment you can exclude from taxable income, you first need to refer to the table to find the number of payments. Then, you figure the amount you can exclude by dividing your after-tax contributions ($12,600) by the number of payments (210). This means that you can exclude $60 of each payment from your taxable income.
Once all of your contributions ($12,600) have been recovered, no more benefits can be excluded from tax. However, if you die before you recover all of your contributions, the remaining contributions can be deducted on your final tax return.
Distributions that you receive from annuities that you purchased with after-tax money will have a portion that is tax-free. Only the premiums that you paid (your investment) are excluded from tax. The Form 1099-R that the insurance company sends you should indicate the taxable amount.
If you buy a commercial annuity, you can’t use the simplified method from the table above to calculate the tax-free portion of each payment. You must calculate the tax-free portion by using the ratio of your cost divided by your total expected return.
For additional information see IRS Publication 575: Pension and Annuity Income.