How to Report Pensions and Annuities on Your Tax Return

To report pensions and annuities on your tax return, put the gross distribution from your Form 1099-R on Line 5a of Form 1040 and the taxable portion on Line 5b. If you never made after-tax contributions to the plan, those two numbers are the same. If you did, you’ll need to calculate how much of each payment is a tax-free return of your own money, and that calculation is where most reporting errors happen.

Start With the 1099-R

Every payer of pension, annuity, IRA, or other retirement distributions must send you a Form 1099-R by January 31 following the tax year, and you’ll get one for each plan or contract that paid you.¹

A handful of boxes carry almost everything you need:

Box 1, Gross Distribution: the total the payer sent you before withholding. This goes on Line 5a.
Box 2a, Taxable Amount: the portion the payer determined was taxable. If it’s filled in, this is your Line 5b figure.
Box 2b, “Taxable amount not determined”: if this is checked, the payer didn’t know your cost basis and you have to work out the taxable portion yourself.
Box 4, Federal Income Tax Withheld: already-withheld tax, which goes in the payments section of your 1040.
Box 7, Distribution Code: tells the IRS what kind of distribution it was. Code 7 is normal, Code 1 is early with no known exception, Code 2 is early with an exception, and Code 4 is a death benefit paid to a beneficiary.²

If your cost basis in the plan is zero (a traditional 401(k) or traditional IRA funded entirely with pre-tax money), Lines 5a and 5b will match and you’re done with the taxable-amount question. If Box 2b is checked, keep going.

Figuring the Taxable Portion When Box 2b Is Checked

Every pension or annuity payment mixes two things: a return of after-tax dollars you already paid tax on (your cost basis), and earnings or employer contributions you haven’t been taxed on yet. The tax-free share of each payment is the return-of-basis piece. Everything else is taxable income on Line 5b.

The Simplified Method

If you receive periodic payments from a qualified employer plan and your annuity starting date was after November 18, 1996, you’ll almost certainly use the Simplified Method. Divide your total after-tax investment in the plan by a fixed number of expected monthly payments based on your age when payments began.

For a single-life annuity starting after November 18, 1996:

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

Joint-and-survivor annuities use a separate table based on combined ages, ranging from 410 payments down to 210.³

Say your after-tax contributions totaled $62,000 and payments began at age 58. Divide $62,000 by 310 and you get $200. That $200 comes out of every monthly payment tax-free, regardless of the payment’s size, until you’ve recovered the full $62,000. After that, every dollar is taxable.

The General Rule

The General Rule applies in narrower situations: nonqualified plans like commercial annuities, and certain qualified plans where the annuity starting date was after November 18, 1996 only if the annuitant was age 75 or older on that date and payments are guaranteed for at least five years. Instead of a table, you compute an exclusion ratio: investment in the contract divided by total expected return over the life of the contract, using the actuarial tables in Publication 939. If your after-tax investment is $100,000 and expected return is $500,000, the ratio is 20 percent. On a $25,000 annual payment, $5,000 is tax-free and $20,000 is taxable, and that ratio holds for the life of the contract.⁴ The underlying authority for taxing annuity income this way is IRC Section 72.⁵

Nondeductible IRA Basis and Form 8606

If you’re taking distributions from a traditional IRA that includes nondeductible contributions, you need Form 8606 to figure the taxable portion. The form tracks your cumulative basis across all your traditional IRAs and calculates what fraction of each distribution is tax-free. The IRS treats all your traditional IRAs as a single pool for this purpose, so you can’t withdraw from the account holding your after-tax money and claim the whole distribution is tax-free.⁶

Early Distributions and Form 5329

Distributions taken before age 59½ from qualified retirement plans and IRAs carry a 10 percent additional tax on top of regular income tax. You report the additional tax on Form 5329, which flows through Schedule 2 to your 1040.⁷ If your 1099-R shows Code 1 in Box 7 and you owe the additional tax on the whole distribution, you can put it directly on Schedule 2 without filing Form 5329.⁸

Several exceptions apply to both qualified plans and IRAs: substantially equal periodic payments,⁹ total and permanent disability, unreimbursed medical expenses above 7.5 percent of AGI, distributions to an alternate payee under a QDRO, domestic abuse victim distributions up to the lesser of $10,000 or 50 percent of the account balance, and qualified birth or adoption distributions up to $5,000.¹⁰

Other exceptions depend on the account type, and mixing them up is a common filing mistake. Separation from service after age 55 (age 50 for public safety employees and certain federal law enforcement and corrections officers) and terminal illness apply to qualified employer plans, not IRAs. The first-time homebuyer exception (up to $10,000 lifetime, used within 120 days) and qualified higher education expenses apply to IRAs, not qualified employer plans.¹⁰ Someone who takes $10,000 from a 401(k) expecting the homebuyer exception to save them will still owe the 10 percent, because that exception is IRA-only. Check the IRS exceptions table against your account type before you file.

Inherited Pensions and Annuities

Inherited retirement accounts don’t get a step-up in basis at death. A pension or annuity stays taxable to the beneficiary the way it would have been to the original owner, and you’ll receive a 1099-R with Distribution Code 4.

A surviving spouse has the most room to maneuver: you can roll the funds into your own IRA or plan and treat the account as yours, which defers tax and resets the RMD schedule to your timeline. You can also stay on as beneficiary if that fits better.

For account owners who died in 2020 or later, most non-spouse beneficiaries must empty the account by December 31 of the tenth year after the owner’s death. If the owner had already started RMDs before dying, finalized IRS regulations require annual RMDs during the 10-year window as well; you can’t hold everything until year 10. If the owner died before their required beginning date, timing within the 10 years is more flexible. Falling short triggers a 25 percent excise tax on the shortfall, dropping to 10 percent if you fix it within two years.¹¹

Five categories of beneficiaries are exempt from the 10-year rule and can stretch distributions over their own life expectancy: a surviving spouse, a minor child of the account holder (with the 10-year clock starting once the child reaches the age of majority), a disabled individual, a chronically ill individual, and any individual not more than 10 years younger than the deceased owner.¹²

Required Minimum Distributions

Beginning in the year you turn 73, you must start taking RMDs from traditional IRAs and most employer retirement plans. Your first RMD can be delayed until April 1 of the following year, but delaying means two taxable distributions land in the same year, which often pushes you into a higher bracket.¹¹

Missing an RMD costs 25 percent of the amount you should have withdrawn, dropping to 10 percent if you take the distribution and correct the return within two years. The excise tax is reported on Form 5329.⁷

Withholding and Estimated Payments

How your income was withheld shows up in Box 4 of the 1099-R and goes in the payments section of your 1040. The withholding rules depend on the type of payment.

Regular pension checks are treated like wages. Your payer withholds based on Form W-4P, which lets you adjust the amount or elect out (though you can’t elect no withholding on payments delivered outside the U.S.).¹³ If you never submit a W-4P, the payer uses default IRS withholding rules.¹⁴

Nonperiodic payments that aren’t eligible rollover distributions have a default 10 percent withholding rate. Form W-4R lets you pick any rate from 0 to 100 percent.¹⁵

Eligible rollover distributions are treated differently. If the money is paid to you directly instead of transferred to another retirement plan, the payer must withhold 20 percent and you cannot opt out. Only a direct rollover, where the funds move plan-to-plan without touching your account, avoids the mandatory 20 percent.¹⁶

If withholding won’t cover your tax, quarterly estimated payments fill the gap. You generally avoid an underpayment penalty if you owe less than $1,000 after withholding and credits, or if you pay in at least 90 percent of the current-year liability or 100 percent of the prior year’s tax, whichever is smaller.¹⁷

If the IRS Disagrees With What You Reported

When the income on your return doesn’t match the 1099-R data the IRS received, you’ll get a CP2000 notice proposing adjustments and additional tax. It’s not an audit, but ignoring it turns into a formal bill.

Compare the notice against your records and respond by the deadline. If you did underreport, you can pay the proposed amount; interest keeps accruing until you do. If the IRS is wrong because you properly excluded your cost basis but the payer never accounted for it, reply with documentation of your after-tax contributions and your Simplified Method or General Rule calculation. Responses go by mail, fax, or digital upload using the access code on the notice.¹⁸

Substantially understating your income tax liability can add a 20 percent accuracy-related penalty on the underpayment, doubling to 40 percent for gross valuation misstatements.¹⁹

State Reporting Is Separate

Everything above is federal. States treat pension and annuity income very differently: some exempt it entirely, some offer partial exclusions that phase out at higher incomes or kick in at a specific age, and some tax it in full. A handful of states have no income tax at all. Check your state’s department of revenue for current rules before you finalize your return, because the state number rarely tracks the federal one.

1
Internal Revenue Service. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
2
Internal Revenue Service. 2025 Instructions for Forms 1099-R and 5498
3
Internal Revenue Service. Publication 575, Pension and Annuity Income
4
Internal Revenue Service. Publication 939, General Rule for Pensions and Annuities
5
Office of the Law Revision Counsel. 26 USC 72 – Annuities; Certain Proceeds of Endowment and Life Insurance Contracts
6
Internal Revenue Service. 2025 Instructions for Form 8606 – Nondeductible IRAs
7
Internal Revenue Service. Instructions for Form 5329 (2025)
8
Internal Revenue Service. Topic No. 557, Additional Tax on Early Distributions From Traditional and Roth IRAs
9
Internal Revenue Service. Substantially Equal Periodic Payments
10
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
11
Internal Revenue Service. Retirement Plan and IRA Required Minimum Distributions FAQs
12
Internal Revenue Service. Retirement Topics – Beneficiary
13
Internal Revenue Service. About Form W-4P, Withholding Certificate for Periodic Pension or Annuity Payments
14
Office of the Law Revision Counsel. 26 USC 3405 – Special Rules for Pensions, Annuities, and Certain Other Deferred Income
15
Internal Revenue Service. 2026 Form W-4R
16
eCFR. 26 CFR 31.3405(c)-1 – Withholding on Eligible Rollover Distributions; Questions and Answers
17
Internal Revenue Service. Estimated Taxes
18
Internal Revenue Service. Understanding Your CP2000 Series Notice
19
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments