Wiley Tax Preparer: A Guide to Form 1040

CHAPTER 8

Retirement Plans, Pensions, and Annuities

A taxpayer may receive income from a retirement plan, pension plan, individual retirement account (IRA), or annuity. The income may be derived from personal, employee, or employer contributions; or the taxpayer may inherit benefits in such plans or accounts.

As a general rule, income from retirement plans, IRAs, and annuities is taxable in full or in part. However, certain rules apply to limit immediate taxation of benefits. There are also various rules that impose penalties on distributions taken too early or too late, or for certain other actions.

Qualified Retirement Plans

A “qualified retirement plan” is a generic term that includes such plans as 401(k), 403(b), simplified employee pensions (SEPs), and pension plans. These plans are “qualified” because of the favorable tax advantages they offer. In return, specific rules must be followed regarding plan contributions and distributions, required communications with plan participants, and antidiscrimination rules for participating in the plans.

ALERT: An IRA is not a qualified retirement plan even though it may share some of the features of qualified plans.

Distributions received from qualified plans, whether received periodically or in a lump sum, are generally taxable. However, the taxable portion of a distribution does not include any portion of the taxpayer's investment, ...