Part of the confusion regarding Box 5 on IRS Form 1099-R comes from the title the IRS has assigned to the box: “Employee contributions or insurance premiums.” Some people think we are deducting this amount from our payments; others have asked about insurance.
However, the amount shown in Box 5 is not a deduction. The easy explanation is, Box 1 shows everything paid to you last year. Of that amount, Box 2a is the taxable portion, and Box 5 is the portion that is not taxable.
For monthly pension payments, the taxable amount is the gross amount minus a portion of the previously taxed amount.
The value on the 1099-R calculates the previously taxed amount using the “Simplified General Rule” or the “General Rule” and life expectancy tables from the IRS. The result is a “recovery” that extends over your expected lifetime or over the joint life of you and your spouse (if applicable).
(Note: Pensions that started before 1987 followed different rules.)
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