IRS Publication 575: Pension and Annuity Income, Rollovers, RMDs

IRS Publication 575 explains how pensions and annuities are taxed: specifically, how to split each payment between the tax-free return of your own after-tax contributions and the taxable earnings, and how to put those numbers on your return. If every dollar in the plan was pre-tax, the answer is simple: the whole payment is taxable. If you have any after-tax money in the plan, some portion of each payment comes back to you tax-free until you have recovered your full basis.

What Publication 575 Covers

The publication applies to distributions from qualified employer plans, including traditional defined benefit pensions and defined contribution plans like 401(k)s and 403(b)s. It also covers commercial annuity contracts and certain disability pensions. Military retirement pay is within 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 criteria under federal tax law.¹

It does not cover Roth IRA distributions (Publication 590-B) or Social Security benefits (Publication 915). If your retirement income comes from several sources, you may need more than one publication to prepare your return.

Investment in the Contract: Your Cost Basis

The concept the rest of the publication is built on is your “investment in the contract.” That is the total amount of after-tax dollars you contributed to the plan, less any amounts you previously received tax-free. You already paid income tax on that money, so the IRS does not tax it again on the way out.

After-tax contributions to a 401(k), nondeductible contributions to a traditional IRA, and amounts you put into a commercial annuity with after-tax dollars all create basis. If the plan was funded entirely with pre-tax contributions, there is no basis and every dollar of the distribution is taxable. When basis exists, a portion of each payment counts as a tax-free return of your own money and the rest is taxable earnings.

The Simplified Method for Periodic Payments

Most people receiving periodic pension or annuity payments from a qualified employer plan use the Simplified Method. It is required if your annuity starting date is after November 18, 1996, and payments come from a qualified plan.²

The method spreads your basis evenly over a fixed number of expected monthly payments. You recover the same tax-free amount each month until the basis is used up.

The Calculation

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

Then find the number of expected monthly payments from the IRS table that matches your situation. 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)

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

Table 2: Joint-and-Survivor Annuity

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

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

Once basis recovery is complete, every dollar you receive after that is fully taxable, even if the table assumed more payments. If you die before recovering all your basis, the unrecovered amount can be claimed as a deduction on your final return.³

When You Use the General Rule Instead

If your payments come from a nonqualified plan or a commercial annuity contract, you cannot use the Simplified Method. You use the General Rule, which computes an exclusion ratio from actuarial life expectancy tables. Publication 939 has the detail. The concept is the same: recover your after-tax investment over time and pay tax only on the earnings portion.²

Reporting the Numbers on Your Return

Every distribution generates a Form 1099-R from your plan administrator. A few boxes drive everything.

Box 1 is the gross distribution, the total paid to you. Box 2a is the taxable amount. The payer sometimes calculates it and sometimes leaves it blank. If Box 2b is checked (“taxable amount not determined”), the payer did not calculate it and you need to run the Simplified Method yourself.⁴

Box 7 carries a distribution code that tells the IRS what type of distribution it is. Code 1 flags an early distribution subject to the 10% penalty. Code 7 is a normal distribution. Code 2 is an early distribution that qualifies for a known exception. Check that the code fits your actual situation before you file, because the IRS processes your return around it.

On Form 1040 (or 1040-SR for filers age 65 and older), enter the gross distribution from Box 1 on the designated line and the taxable amount from Box 2a next to it.⁵ When those amounts differ because you are recovering basis through the Simplified Method, keep your worksheet with your records in case the IRS asks how you got there.

When You Need Form 5329

Form 5329 reports the 10% additional tax on early distributions or claims an exception to it. You do not always have to file it. If your 1099-R already shows code 1 in Box 7 and you owe the penalty on the full taxable amount with no exception, you can put the additional tax directly on Schedule 2 of Form 1040 and skip Form 5329.⁶

You do need Form 5329 when you qualify for a penalty exception that is not already reflected in the distribution code. If you separated from service at 56 but your 1099-R shows code 1, file Form 5329 and enter the exception code so the penalty is not assessed. Not filing it in that situation almost always produces an IRS notice charging you the full 10%.⁷

Form 5329 is also where you report and pay the excise tax on a missed required minimum distribution.

Federal Withholding on Your Payments

The withholding rules differ by payment type, and the default rates can leave you either over- or underwithheld if you never file a form.

For periodic pension or annuity payments, your payer withholds based on the Form W-4P you file. If you never file one, the payer withholds as if you are single with no other adjustments, which frequently overwithholds.⁸ You can adjust the amount, or opt out entirely, by filing a new W-4P.

For nonperiodic distributions that are not eligible rollover distributions, the default withholding is 10% of the taxable amount.⁹ Use Form W-4R to change that rate or opt out.

Eligible rollover distributions carry mandatory 20% federal withholding when paid to you rather than transferred directly. You cannot opt out. A direct trustee-to-trustee transfer is the only way to avoid it.¹⁰

Tax-Free Rollovers

A direct rollover moves funds straight from one institution to another. Nothing is withheld and no tax is triggered.

An indirect rollover is riskier. The plan pays you, and you have 60 days to deposit the money into another eligible retirement plan or IRA.¹¹ Miss the 60-day window and the full amount becomes taxable income for the year. If you are under 59½, the 10% early withdrawal penalty may also apply. And because the payer withheld 20% on the way out, you need to come up with that 20% from other funds to roll over the full distribution and avoid tax on the shortfall.

Self-Certifying a Missed 60-Day Deadline

If you missed the deadline for reasons beyond your control, you may be able to self-certify a late rollover instead of requesting a private letter ruling. Qualifying reasons include a financial institution error, a serious family illness, a misplaced check that was never cashed, and severe damage to your home, among others. You must complete the rollover within 30 days after the reason for the delay no longer applies, and the IRS must not have previously denied a waiver for that distribution.¹²

The One-Per-Year IRA Rollover Rule

For IRA-to-IRA indirect rollovers, you are limited to one rollover in any 12-month period across all your IRAs combined. All your traditional, Roth, SEP, and SIMPLE IRAs count as one IRA for this rule. Direct trustee-to-trustee transfers, Roth conversions, and rollovers between employer plans and IRAs do not count against the limit.¹¹

Early Distributions and the 10% Additional Tax

Taking money out of a qualified retirement plan or IRA before age 59½ adds a 10% tax on top of the regular income tax on the taxable portion.³ The 10% applies only to the amount that is includible in gross income, not to the tax-free return of any after-tax contributions.

The most commonly used exceptions:

Separation from service at age 55 or older. Distributions from that employer’s qualified plan are penalty-free if you leave during or after the year you turn 55. For public safety employees of state or local governments, the age is 50. This exception does not apply to IRAs.⁷
Total and permanent disability.
Substantially equal periodic payments (SEPPs). A series of payments based on your life expectancy, which must continue for at least five years or until you reach 59½, whichever is later. Modifying the schedule before then triggers retroactive penalties plus interest.¹³
Distributions to an alternate payee under a qualified domestic relations order (QDRO). This exception covers qualified employer plans only. If QDRO funds are first rolled into an IRA and then withdrawn, the QDRO exception no longer applies and the standard early distribution rules apply.³
Unreimbursed medical expenses exceeding the AGI threshold.

SECURE 2.0 Additions

SECURE 2.0 added several exceptions that are now in effect:

Terminal illness. If a physician certifies that you are expected to die within 84 months, distributions are exempt from the penalty with no dollar cap. You can repay the amount to an IRA within three years if your condition improves.
Emergency personal expenses. Up to $1,000 per calendar year, penalty-free, for an unforeseeable personal financial emergency. The limit is not adjusted for inflation. You may repay within three years, but cannot take another emergency distribution during that period unless the earlier one has been repaid.¹⁴
Domestic abuse victims. Up to $10,000 (indexed for inflation) or 50% of the account, whichever is less, penalty-free during the one-year period following the abuse. Repayable within three years.

Required Minimum Distributions

You cannot leave money in a qualified retirement plan indefinitely. For individuals who turn 73 before 2033, the applicable age is 73. For those who turn 74 after December 31, 2032, it is 75.¹⁵

Your required beginning date is April 1 of the year after the year 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 your current employer’s plan until April 1 of the year after you retire. That 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 catch the mistake and withdraw the missed amount within the correction window, the penalty drops to 10%.¹⁶ The correction window generally runs until the end of the second tax year after the year the penalty was imposed. Set a calendar reminder; this is one of the easier expensive mistakes to avoid.

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. About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
5
Internal Revenue Service. IRS Publication 575 – Pension and Annuity Income
6
Internal Revenue Service. Instructions for Form 5329
7
Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions
8
Internal Revenue Service. 2026 Form W-4P
9
Internal Revenue Service. Pensions and Annuity Withholding
10
eCFR. 26 CFR 31.3405(c)-1 – Withholding on Eligible Rollover Distributions
11
Internal Revenue Service. Rollovers of Retirement Plan and IRA Distributions
12
Internal Revenue Service. Revenue Procedure 2020-46
13
Internal Revenue Service. Substantially Equal Periodic Payments
14
Internal Revenue Service. Notice 2024-55 – Guidance on Emergency Personal Expense Distributions
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