Pension plans, also called annuities, are a type of employer-sponsored retirement plan, but they are not the same as a 401(k), an IRA, or other retirement plans. A pension is a defined benefit plan which means that it provides a specific payment amount to you upon retirement. See IRS Publication 939, General Rule for Pensions and Annuities.
Pension Plan
Contributions
Each tax year, the IRS announces cost of living adjustments for pension plan dollar limitations annually. Section 415 of the Internal Revenue Code provides dollar limitations on benefits and contributions under qualified retirement plans and requires that the IRS annually adjust these limits for inflation and increases in the cost of living. You can use the information below to guide you in planning for your tax return. When you prepare your return on eFile.com, all you need to do is enter the information from the income you received from your pension plan(s). We'll do all the work for you to report your pension income and calculate any tax amounts.
How to File Taxes with Retirement
- Open and contribute to your pension or other retirement account through employee and personal contributions.
- Write off or deduct your contributions each year you file taxes.
- After retiring, begin taking withdrawals during the year.
- Get your 1099-R which should be issued by January 31.
- Sign up for an eFile account and add all your retirement income to your account - let eFile do the hard work for you.
Pensions Are Taxable Income
Generally, pension income is always taxable on the federal level, while some states vary. Depending on the pension, it may be fully taxable or partially taxable. Your pension income - a monthly fixed payment issued by an employer you worked for - is taxed based on a few simple criteria:
- Fully taxable: you made no investments or contributions to the plan, only your employer did.
- Fully taxable: you made pre-tax contributions to your pension account.
- Partially taxable: you made after-tax contributions to your pension account.
To calculate the taxable portion of your pension, simply enter your information in your eFile account and taxes will be calculated and assessed based on your entries. The Form 1099-R you receive should also note the taxable amount in Box 2a; the rest is done for you when you enter this form.
Retiring soon? See this helpful IRS Tax Guide for the Retirees.
As an employee, depending on your situation, consider making contributions to your pension or other tax-deductible retirement accounts in order to reduce your taxable income. When you contribute pre-tax dollars to your traditional IRA or pension, these are deductible in the year of the contribution; for after-tax pension and Roth IRA contributions, it will decrease your taxes when you take money from the account. When you contribute to a Roth IRA, the contributions are not deductible, but your distributions when you retire are fully tax-free. See more details on taxable and nontaxable income.
Related: Which states have no pension tax?
When taking pension distributions, this income and all your other income are taxed as regular income at your effective tax rate. If you take an early distribution, there is a penalty on any pension or retirement account taken prematurely. As a retiree, you may earn income as a wage or salary worker or still be self-employed while collecting retirement income. If you change your income situation when you retire, consider filling out and submitting a new W-4 to your employer. This way, you can withhold the right amount of taxes combined with your other income.
You can also withhold money from your pension payments by submitting a W-4P, Withholding Certificate for Pension or Annuity Payments; for Social Security, submit a W-4V, Voluntary Withholding Request. These can help keep your taxes balanced so you do not owe too much when you file, nor be owed a large tax refund made up of money you could have had all year.
Dollar Amount Limits on Pension Plan Contributions
The information below shows how most of the amounts increase over three years. The table includes information current, future, and past taxes.
There are limitations to many parts of retirement plans. Under a defined benefit plan, there are limits to how much can be taken out as well as contributed. Certain 401 or 404 plans have annual compensation limits, and many plans are variable if an employer is involved with these contributions. Generally, these amounts are fairly high, and many taxpayers will not have to worry about reaching them in a given tax year.
Retiree Tax Guide
Below, find contribution limits for various types of retirement plans. Each is organized by the type of limit and tax year (annual limit); additional information can be found below the table.
Limit Type
2021
2022
2023
Defined Benefit
$230,000
$245,000
$265,000
Defined Contribution
$58,000
$61,000
$66,000
457 Elective Deferrals or 401(k), 403(b)
$19,500
$20,500
$22,500
Annual Compensation
$290,000
$305,000
$330,000
Key Employee or
"Top Heavy"
$185,000
$200,000
$215,000
Highly Compensated
Employee
$130,000
$135,000
$150,000
"Catch-up" for 401(k), 403(b) or 457 savings
for employee age 50+
$6,500
$6,500
$7,500
"Catch-up"
(Employer)
$3,000
$3,000
$3,500
SEP Compensation
$290,000
$305,000
$330,000
SIMPLE
$13,500
$14,000
$15,500
State & Local Gov't
& Tax-Exempt
Organizations
$19,500
$20,500
$22,500
"Control Employee"
$115,000
$120,000
$130,000
You can use these amounts to plan your retirement year-to-year, this way, you do not exceed any limits. Notably, these amounts are generally very high; most taxpayers will not need to worry about them. The items below are based on the current tax year compared to last year.
- The dollar amount for determining the maximum account balance in an employee stock ownership plan subject to a 5-year distribution period is $1,330,000, up from $1,230,000. The dollar amount used to determine the lengthening of the 5-year distribution period is $260,000, up from $245,000.
- The annual compensation limitation for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan to be taken into account is $490,000, up from $450,000.
- The annual "catch-up" contribution limit has not changed for Individual Retirement Accounts or IRAs for those over 50, which is a limit of $1,000.
- The "catch-up" contribution limit for SIMPLE plans at age 50 or more is $3,000, which has not changed.
- The deductible amount for an individual making qualified retirement contributions is $6,500, up from $6,000.
- The applicable dollar amount for determining the deductible amount of traditional IRA contributions for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is $116,000, up from $109,000. The applicable dollar amount for all other taxpayers (other than married taxpayers filing separate returns) is $73,000, up from $68,000 The applicable dollar amount for a taxpayer who is not an active participant but whose spouse is an active participant is $218,000, up from $204,000.
- Review the current year limits, phaseout ranges, and more.
- The adjusted gross income limitation for determining the maximum Roth IRA contribution for taxpayers filing a joint return or as a qualifying widow(er) is $218,000, up from $204,000. The AGI for a married filing-separately taxpayer is not subject to the annual adjustment and remains at $0. The adjusted gross income limitation for all other taxpayers (other than married taxpayers filing separate returns) is $138,000, up from $129,000.
There are limitations on annual benefit amounts as well as how much can be contributed each year. These change from tax year to tax year, typically by small amounts. Of course, there are various types of plans, and the limits for each often vary. The annual compensation limits apply to 401(a)(17)/404(l) plans, for example. Elective deferrals are often for 401(k) plans but can also be for other plans.
Did you know that there is a tax credit for making contributions to your retirement account? The Saver's Tax Credit has more detailed limits and phaseout thresholds as a nonrefundable tax credit that can help save you more money. The amount of your credit is based on your IRS filing status and adjusted gross income, or AGI.
The Saver's Tax Credit is a government incentive encouraging people to contribute to retirement. The credit is geared towards low-to-moderate income earners and can help save you money on taxes. You can claim this tax credit and other applicable tax savings when you file your taxes online through eFile.com. See how eFile.com compares to H&R Block® and TurboTax® before you eFileIT.
Related Information about Pensions and Retirement Income
- Retirement plans and taxes
- Saver's Tax Credit for retirement contributions
- Maximum retirement plan contribution limits
- Minimum distribution limits for retirement income
- Tax penalties for early withdrawal of retirement benefits
- Taxable Social Security benefits.
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