If your only income is from Social Security or equivalent railroad retirement benefits, your retirement income is probably not taxable. If you have other income, your benefits are not taxed unless your adjusted gross income for the taxable year is above the base amount for your tax filing status.
Pension or annuity payments from a qualified employer retirement plan may be taxed fully or partially in the year received. These payments are usually taxed fully if (1) your employer contributed all of the cost and that cost was not included in your taxable wages or (2) all of your previously taxed contributions were returned to you tax-free in previous years. If you contributed after-tax money to your pension or annuity, the amount of the payment that represents after-tax contributions by either you or your employer is not taxable. Pension or annuity payments received before you are 59 ½ years of age may be subject to an additional 10% tax on early distributions, unless you left the employment in or after the year you turned 55 years of age, or the payments are part of a series of substantially equal payments for life. Taxable portions of pension or annuity payments are generally subject to federal income tax withholding.
Distributions from traditional individual retirement accounts (IRAs) are taxed fully or partially. If you made only deductible contributions to your IRA, withdrawals are taxed fully. Qualified distributions from your Roth IRA are generally not included in your gross income. Usually a qualified distribution is any payment made:
- Five taxable years after the year of your first contribution, and
- After you reach age 59 ½ years, or
- You become disabled, or
- To buy, build, or rebuild your first home or that of an immediate family member, or
- To a beneficiary after your death.
The part of any distribution that is not qualified may be taxed as ordinary income and subject to the 10% early-distribution tax. You can learn more about taxation of retirement income at the U.S. Internal Revenue Service’s Web site at http://www.irs.gov/faqs/index.html.
