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A qualified retirement plan is a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity plan.

If you made after-tax contributions to your pension or annuity plan, you can exclude part of your payments from your income.

Determine the tax-free amount based on when your payments first began. This amount will always be the same, even if your payment amount changes.

Use the Simplified Method to figure the tax-free part of the payments if:

  • Your annuity starting date was after July 1, 1986, and you used this method last year to figure the taxable part.
  • Your annuity starting date was after November 18, 1996, and both of the following apply:
    • The payments are from a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity.
    • On your annuity starting date, either you were under age 75 or the number of years of guaranteed payments was fewer than five. See IRS Publication 575 Pension and Annuity Income for the definition of guaranteed payments.

The Simplified Method Worksheet helps you figure the taxable and tax-free parts of your annuity payments each year.

Determining the taxable portion of an annuity requires that you determine the amount of your contributions that have been recovered in all prior years so that your exclusion does not exceed your contributions. This has to be recomputed each year.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.


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