Pensions, annuities, qualified plans, unqualified plans, periodic payments, lump sum distributions, rollovers – all have their own special treatment for tax purposes. Find out which rules apply in your case.
There are basically three groups of retirement plans, pensions, and annuities for U.S. federal income tax purposes:
Pensions or annuities you receive from a qualified pension plan that your employer maintains to provide benefits to employees
Benefits you receive when you retire on disability
A commercial annuity plan that you purchase yourself.
Pensions and Annuities
Pensions and annuities are different types of arrangements, but have similar tax treatment.
For tax purposes, a pension is a “a series of definitely determinable payments made to you after you retire from work”. So pensions are generally associated with benefits you receive from an employer-provided plan based on your years of service and your compensation while you were working.
An annuity is “a series of payments under a contract made at regular intervals over a period of more than one full year”. Payments can be fixed or variable, and you can take out an annuity contract on your own, or with the help of your employer.
Types of Pensions and Annuities
There are different types of pensions and annuities, in terms of the period over which benefits are paid, who receives the benefits, and whether the benefits are fixed or variable.
Fixed-period annuities: You receive fixed amounts at regular intervals over a specified period of time.
Annuities for a single life: You, as the beneficiary, receive fixed amounts at regular intervals for life. The payments cease upon your death.
Joint and survivor annuities: You, as the first annuitant or beneficiary, receive fixed amounts at regular intervals for life. After your death, the second annuitant (your spouse, dependent, or other designated beneficiary) then receives benefits for the rest of his or her life. The amounts paid to the second annuitant may or may not be the same as for you as the first annuitant.
Variable annuities: You receive payments that may vary in amount, either over a specified period of time, or for life. The amount of the annuity payments may depend on the profits earned by the pension or annuity fund or a mutual fund, and cost-of-living indexes.