IRS Publication 575: How to Report Pension and Annuity Income

IRS Publication 575 is the Internal Revenue Service’s guide to figuring out how much of your pension or annuity income is taxable and how much comes back to you tax-free. If you contributed after-tax dollars to a pension, 401(k), 403(b), or commercial annuity, part of each payment is a return of that money and part is taxable earnings. Publication 575 shows you how to split the two, how to report the result on your return, and how the surrounding rules on withholding, rollovers, early withdrawals, and required distributions fit in.

What Publication 575 Covers

The publication applies to distributions from qualified employer plans — traditional defined benefit pensions, 401(k)s, and 403(b)s — along with commercial annuity contracts and certain disability pensions. Military retirement pay is in scope, though disability-related military pensions may be partially or fully excluded from income when the disability resulted from active-duty service and the recipient meets the federal criteria.¹

Two common sources of retirement income sit outside Publication 575. Roth IRA distributions are covered by Publication 590-B, and Social Security benefits are covered by Publication 915. If your retirement income comes from more than one place, expect to pull from more than one IRS publication to finish your return.

Your Investment in the Contract

Everything in Publication 575 turns on a single number: your “investment in the contract.” That is the total of after-tax dollars you contributed to the plan. Because you already paid income tax on that money, the IRS does not tax it a second time when it comes back to you.

After-tax contributions to a 401(k), nondeductible contributions to a traditional IRA, and premiums paid into a commercial annuity with after-tax dollars all create cost basis. A plan funded entirely with pre-tax dollars has no basis, so every payment from it is fully taxable. When basis does exist, each payment you receive is split: part is a tax-free return of your contributions, and part is taxable earnings.

Figuring the Tax-Free Portion With the Simplified Method

Most people receiving periodic payments from a qualified employer plan use the Simplified Method. It is required if your annuity starting date is after November 18, 1996, and your payments come from a qualified plan.² The method spreads your cost basis evenly across a fixed number of expected monthly payments, so the same tax-free dollar amount comes out of each check until your basis is used up.

The Calculation

Start with your investment in the contract: total after-tax contributions, minus any amounts you have already received tax-free. That is the amount still to be recovered.

Then look up the number of expected monthly payments from the appropriate IRS table. Use Table 1 for a single-life annuity, based on your age at the annuity starting date. Use Table 2 for a joint-and-survivor annuity, based on the combined ages of you and your beneficiary.²

Table 1 — Single-Life Annuity (starting date after November 18, 1996)

Age 55 or under: 360 payments
Age 56 to 60: 310 payments
Age 61 to 65: 260 payments
Age 66 to 70: 210 payments
Age 71 or older: 160 payments

Table 2 — Joint-and-Survivor Annuity

Combined ages 110 or under: 410 payments
Combined ages 111 to 120: 360 payments
Combined ages 121 to 130: 310 payments
Combined ages 131 to 140: 260 payments
Combined ages 141 or older: 210 payments

Divide your investment in the contract by the number from the table. The result is the tax-free portion of each monthly payment. If payments come quarterly or annually, multiply the monthly figure by the number of months each payment covers. The exclusion stays the same for every payment until your basis is fully recovered.

After you have recovered your full basis, every dollar from that point forward is taxable, even if the table assumed more payments were coming. If you die before recovering all your basis, the unrecovered amount can be claimed as a deduction on your final tax return.³

If Your Payments Come From a Nonqualified Plan

Payments from a nonqualified plan or a commercial annuity contract cannot use the Simplified Method. They use the General Rule, which calculates an exclusion ratio from actuarial life expectancy tables. The IRS covers that calculation in Publication 939. The concept is the same — recover your after-tax investment over time, pay tax only on earnings — but the arithmetic is heavier.²

Federal Withholding on Your Payments

Withholding rules differ by payment type, and the defaults can bite if you ignore them.

For periodic pension or annuity payments, the payer withholds based on the Form W-4P you file. If you never file one, withholding defaults to single with no adjustments, which usually takes out more than you owe.⁴ You can file a new W-4P at any time to adjust the amount or opt out.

For nonperiodic distributions that are not eligible rollover distributions, the default rate is 10% of the taxable amount.⁵ You can elect a different rate or opt out on Form W-4R.

Eligible rollover distributions are the strict case. If you take a distribution that could have been rolled over directly but choose to receive it yourself, the payer must withhold 20% for federal tax, and you cannot opt out. The only way around the 20% is a direct trustee-to-trustee transfer.⁶

Reporting the Income on Your Return

Everything flows from Form 1099-R, which your plan administrator sends for each distribution during the year.

Reading Your 1099-R

Box 1 shows the gross distribution. Box 2a shows the taxable amount, which the payer either calculates for you or leaves blank. If Box 2b is checked (“Taxable amount not determined”), you are responsible for working out the taxable portion yourself using the Simplified Method.⁷

Box 7 holds a distribution code describing the payment. Code 1 is an early distribution subject to the 10% additional tax. Code 7 is a normal distribution. Code 2 is an early distribution where the payer knows an exception applies. The IRS processes your return against this code, so make sure it matches what actually happened.

Entering the Numbers on Form 1040

Report pension and annuity income on Form 1040 (or 1040-SR if you are 65 or older). Enter the Box 1 gross distribution on the designated line and the Box 2a taxable amount next to it.⁸ When the two differ because you are recovering basis through the Simplified Method, hold on to a copy of your worksheet in case the IRS asks about the gap.

When You Also Need Form 5329

Form 5329 reports the 10% additional tax on early distributions or claims an exception to it. You do not always need it. If your 1099-R shows code 1, you owe the penalty on the full taxable amount, and you have no exception to claim, you can report the extra tax on Schedule 2 of Form 1040 without filing Form 5329.⁹

You do need Form 5329 when you qualify for a penalty exception that your 1099-R does not reflect. If, for example, you separated from service at 56 but the 1099-R shows code 1, you file Form 5329 with the appropriate exception code so the penalty is not assessed. Skipping the form while claiming an exception almost always triggers an IRS notice for the full 10%.¹⁰ Form 5329 is also where you report (or request reduction of) the excise tax for missing a required minimum distribution.

Early Distributions and the 10% Additional Tax

Taking money out of a qualified plan or IRA before age 59½ triggers a 10% additional tax on top of the regular income tax on the taxable portion.³ The penalty applies only to the amount included in gross income, not to the tax-free return of after-tax contributions.

Several exceptions waive the 10% while leaving ordinary income tax in place:

Separation from service during or after the year you turn 55, for distributions from that employer’s qualified plan. The age drops to 50 for public safety employees of state or local governments. This exception does not reach IRA distributions.¹⁰
Total and permanent disability.
Substantially equal periodic payments based on your life expectancy, continued for at least five years or until age 59½, whichever is later. Changing the schedule early retroactively imposes the penalty plus interest on all prior payments in the series.¹¹
Distributions to a former spouse or dependent under a qualified domestic relations order from a qualified plan. Once QDRO funds are rolled into an IRA, the exception no longer applies and ordinary early-withdrawal rules take over.
Unreimbursed medical expenses above the adjusted gross income threshold.

The SECURE 2.0 Act added more narrowly targeted exceptions, including penalty-free distributions for a terminal illness certified by a physician, up to $1,000 per year for an unforeseeable personal emergency,¹² and distributions to victims of domestic abuse up to $10,000 or 50% of the account, whichever is less. Each has its own repayment window.

Rollovers and the 60-Day Rule

Rolling retirement money from one plan or IRA to another is the standard way to move funds without a current tax hit. A direct rollover sends the money straight from one custodian to another, with no withholding and no risk of missing a deadline.

An indirect rollover is more fragile. The plan pays you, and you have 60 days to deposit the money into another eligible retirement plan or IRA.¹³ Miss the 60 days and the full amount becomes taxable income for the year, plus the 10% penalty if you are under 59½. Because the plan already withheld 20% on the way out, you have to supply that 20% from other funds to roll over the full balance; whatever you fail to replace is treated as a taxable distribution.

If you miss the window for reasons beyond your control — a bank error, a serious family illness, a check that was never cashed, severe damage to your home, among others — you may be able to self-certify a late rollover instead of applying to the IRS for a private letter ruling. The rollover has to be completed within 30 days after the obstacle no longer applies, and the IRS cannot have previously denied a waiver for the same distribution.¹⁴

One further limit applies to IRA-to-IRA indirect rollovers: you can only do one in any 12-month period, counting all your traditional, Roth, SEP, and SIMPLE IRAs together as a single IRA. Direct trustee-to-trustee transfers, Roth conversions, and rollovers between employer plans and IRAs do not count against the limit.¹³

Required Minimum Distributions

You cannot leave the money in a qualified plan indefinitely. For individuals who reach age 73 before 2033, the applicable age for required minimum distributions is 73. For those who turn 74 after December 31, 2032, it rises to 75.¹⁵

Your required beginning date is April 1 of the year after you reach the applicable age. If you are still working and do not own more than 5% of the company, you can delay RMDs from that current employer’s plan until April 1 of the year after you retire. The delay does not apply to IRAs or to plans from former employers.

Missing an RMD triggers a 25% excise tax on the shortfall. If you correct the mistake inside the correction window, which generally runs through the end of the second tax year after the one the penalty was imposed, the rate drops to 10%.¹⁶ Even the reduced rate is steep enough that a calendar reminder each year is cheap insurance.

1
Office of the Law Revision Counsel. 26 U.S. Code 104 – Compensation for Injuries or Sickness
2
Internal Revenue Service. Publication 575 Pension and Annuity Income
3
Office of the Law Revision Counsel. 26 U.S. Code 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
4
Internal Revenue Service. 2026 Form W-4P
5
Internal Revenue Service. Pensions and Annuity Withholding
6
eCFR. 26 CFR 31.3405(c)-1 – Withholding on Eligible Rollover Distributions
7
Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
8
Internal Revenue Service. IRS Publication 575 – Pension and Annuity Income
9
Internal Revenue Service. Instructions for Form 5329
10
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
11
Internal Revenue Service. Substantially Equal Periodic Payments
12
Internal Revenue Service. Notice 2024-55 – Guidance on Emergency Personal Expense Distributions
13
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
14
Internal Revenue Service. Revenue Procedure 2020-46
15
Office of the Law Revision Counsel. 26 U.S. Code 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
16
Office of the Law Revision Counsel. 26 U.S. Code 4974 – Excise Tax on Certain Accumulations in Qualified Retirement Plans