BillM223
Expert Alumni

Retirement tax questions

When you have "basis" in a pension or annuity (the after-tax dollars), when you have a qualified plan (most common), the basis is not distributed to you all at once, but over time along with earned dollars.

 

Thus, your annual annuity payment will be partially basis (tax-free) and partially (actually, usually mostly) taxable income.

 

In the screens after you enter the 1099-R numbers, you will be asked a series of questions so that TurboTax can apply the correct rule to calculate the taxable amount of your annuity. Most taxpayers will use the Simplified Method, which spreads the amount of basis out over some actuarial amount of time, so that each year's distribution is part basis and part taxable amounts.

 

Indeed, in many cases, if the person had been with the pension the entire time, then the pension administrator could do this calculation themselves, knowing how much after-tax contributions there were. In this case, the pension administrator puts the taxable amount in box 2a. The difference between box 1 and box 2a is the "return of basis".

 

Since the annuity was wholly funded from this IRA (if I understood you correctly), you might call the annuity administrator and remind them that they should know the amount of basis (I assume that you know what the basis was in the IRA), and tell them if they don't know. They may be willing to issue a corrected 1099-R listing the actual taxable amount in box 2a, which would save you some work (you just have to tell TurboTax to use the amount in box 2a).

 

Not to worry, TurboTax doesn't want you to be double-taxed; this is just often a problem for taxpayers who have no idea what their basis is (or what the definition of basis even might be).

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