Things To Know About Pensions, Annuities, and Tax Withholding

Generally, the money you receive from income annuities and pensions is not immune to Federal tax withholding. This is the same withholding system you would experience if you received money from stock bonuses, profit-sharing, or any other type of deferred income plan. In other words, the money that you get from that annuity you purchased from your insurance company could face tax withholding if it is a regular periodic payment.

However, if this payment is sporadic or not counted as income, you don’t always need to worry about withholding. In certain cases, you can choose to stop having your tax withheld. Keep in mind that this is permanent until you reverse your decision. Here is some more information about how withholding affects your annuities and pension.

Periodic Payments

Periodic payments are those stemming from your annuity or pension that last more than one year. Typically, these payments are expected to be substantial deposits that take place yearly or more frequently. For withholding purposes, funds from annuities and pensions are treated the same as a source of income. You can calculate the amount that will be withheld by examining tax guides.

Nonperiodic Payments

Unless you choose to have your wage withheld, 10% of nonperiodic payments will be removed from your total. Otherwise, you can get the full amount and deal with taxes in the new year. This applies only to annuities or pensions where you do not receive a regular payment.

Foreign Payments

If payments are made to an individual living outside the US or a residential alien inside the country, money must be withheld. You can examine your W-4P forms to understand more about mandatory withholding.

Eligible Rollover Distributions

When you have rollover distributions, these will automatically be taxed at 20% unless you choose to put the funds into a retirement account. Although there are exceptions, this rollover is the only taxable portion of a qualifying tax-sheltered program. You can examine tax guides to understand more about when these funds are taxable.

Reporting Withholding Information

You will need to report your withheld taxes when you file. They are reported on a unique withheld taxes form that has options for funds from pensions and annuities. Additionally, you will be asked to provide a 1099-R with your distribution amounts.

Your annuities and pensions are subject to tax withholding. By learning more about the various factors, you can prepare yourself for dealing with this.