When collecting retirement allowances through annuity or pension payments from a qualified employer retirement plan, it’s important to note that all or some allocation of the amounts you accept may be subject to taxation.

The benefits that you collect are completely taxable if you accept no investment in the contract because any of the following circumstances may apply:

• You have not added to your pension or are not considered a contributing party to the annuity.
• Your employer did not deduct contributions from your salary,
• You collected all of your contributions (considered your investment in the contract) without applicable taxes in previous years

If you contributed after-tax dollars to your alimony or annuity, your alimony payments are partially taxable. You will not pay tax on the portion of the transaction that represents a return of the after-tax portion you paid. This portion is considered investment in the contract, and includes the amounts your employer contributed that were taxable to you if you also contributed. Taxpayers determine the tax on partly taxable pensions through either the General Rule or the Simplified Method. If the starting date of your alimony or accomplishment payments is after November 18, 1996, it’s advised that you use the Simplified Method to calculate the amount of tax assess to your annuity payment.

Accepting retirement benefits such as pensions prior to age 59½, may make you accountable for paying an additional 10% tax on the “early” distribution, unless you qualify for an exception. Distributions and portion of distributions that are tax-free are not subject to the early distribution penalty. Some types of these tax free distributions are:

• Those made as a section of a series of substantial payments delivered in a set period of time that begin following your last day of service.
• Those collect due to permanent disability.
• Those distributed after the plan participant has become deceased.
• Those collected after service and either in or after you reach 55 years of age.

The taxable allotment of your payments is typically accountable to federal income tax withholding.

You may be able to opt not to have tax withheld from your benefits or payments (unless they are eligible rollover distributions) or may wish to specify how much tax is withheld. If so, you have to provide the payer with Form W-4, Withholding Certificate for Pension or Annuity Payments. If you are a U.S. resident alien or citizen and you do not accommodate the payer with an address in the United States or its possessions, you cannot chose to have no tax withheld. Payers calculate the tax from alternate payments the same as salaries and wages. If you do not provide the withholding certificate, the payer has to treat you as married and claiming three withholding allowances.

Even if you provide a Form W-4P and accept a lower amount, if you do not give the payer with your actual Social Security number, tax will be withheld as if you were individual and claiming no withholding.

If the withholding of taxes throughout the year is not enough, you may have to make estimated tax payments to account for any underpayment.

Special rules take effect for non-periodic payments from qualified retirement plans. If you accept an eligible rollover distribution, the payer must withhold 20% of it, even if you plan on rolling it over later. You can chose a direct rollover to avoid this 20%.