Lines 4c and 4d of Form 1040 were used rather than lines 5a and 5b for tax years prior to 2020. The change from 2020 remains in place on the 2021 tax return you'll file in 2022.
Definition and Example of Line 5a on Form 1040
Pension and annuity payments entered on line 5a may include distributions from 401(k), 403(b), and 457(b) plans.
- A 401(k) plan is a retirement savings plan available from many for-profit companies.
- A 403(b) plan is a retirement savings plan for religious leaders and many public school employees, as well as those who work for nonprofit organizations.
- A 457(b) plan is for local and state government employees, as well as highly compensated employees at tax-exempt organizations such as charities, non-profit hospitals, and unions.
There are four main categories of annuities from which you might receive payments:
- Fixed-period: This type of annuity pays regular, set amounts of money over a predetermined length of time.
- Single-life: This annuity also makes regular, set payments, but they end with the recipient's death.
- Joint and survivor: The survivor continues to receive payments after the first recipient of this type of annuity dies. Payments may be of the same or a different amount.
- Variable: The payments from this type of annuity vary, depending on factors such as the profit made on the annuity funds or a cost-of-living index.
A company may purchase an annuity for its employees in lieu of other retirement savings plans.
You should leave line 5a blank if your pension and annuity payments were fully taxable. Enter the total amount of those payments on line 5b instead.
Federal Distribution Payments and Foreign Pension Payments
Distributions from the Federal Employees' Retirement System or its predecessor, the Civil Service Retirement System, would also be entered on line 5a, as would money from a foreign pension plan. Distributions from a Thrift Savings Plan would be entered on line 5a as well. This is the equivalent of a 401(k) for federal workers.
For the 2021 tax year, Line 4a is for total IRA distributions, and line 4b is for the taxable amount of those distributions for the 2021 tax year.
Who Uses Line 5a on Form 1040?
Anyone who has received pension or annuity payments that are not fully taxable in the tax year would use line 5a on Form 1040. You should receive a 1099-R from all of the firms managing those retirement accounts.
Using Form 1040-SR
Total pension and annuity payments are also reported on line 5a of Form 1040-SR, the income tax return designed for taxpayers who are age 65 and older. Taxable pension and annuity payments are reported on line 5b of this form as well. Form 1040-SR uses larger print than the standard 1040. It has a standard deduction chart that's easier to read and use.
Using Form 1040-NR
Filers of Form 1040-NR for U.S. nonresidents would use line 17a to report total pension and annuity income in previous years. They would use line 17b to report taxable pension and annuity income, but this form was also redesigned for tax years 2020 and 2021, so those filers will now use lines 5a and 5b, as well.
The following types of retirement income should be reported on line 1 of Form 1040 rather than on line 5a: Corrective distributions of excess salary deferrals or other excess contributions to retirement plans and payments from disability pensions received before you've reached the minimum age for retirement benefits as set by your employer.
Taxation of Pension and Annuity Payments
The IRS considers your payments to be fully taxable if you didn't contribute anything to your pension or annuity, or you received all your cost back tax-free in a prior year. Military retirement payments shown on a Form 1099-R are also considered to be fully taxable.
See IRS Publication 525, Taxable and Nontaxable Income for information on military disability pensions. See IRS Publication 575, Pension and Annuity Income for information on U.S. Railroad Retirement Board payments.
Enter the total amount on Line 5b if your Form or Forms 1099-R show the taxable portion of your pension and/or annuity payments. You must calculate it using either the General Rule or the Simplified Method if the taxable portion isn't given. The General Rule is explained in IRS Publication 939, General Rule for Pensions and Annuities.
Calculate Using the Simplified Method
You must use the IRS-backed Simplified Method in most cases. It can be found in the Form 1040 and Form 1040-SR instructions. You must use it if your annuity starting date was after July 1, 1986, if you used the Simplified Method in the prior tax year, or if your annuity starting date was after November 18, 1996. Both of the following conditions must apply as well:
- The payments are from a qualified employee plan, a qualified employee annuity, or a tax-sheltered annuity.
- You were under age 75, or the number of years of guaranteed payments was fewer than five on your annuity starting date.
Your annuity's starting date is the later of the first day of the first period for which you received a payment, or the date the plan's obligations became fixed.
You can have the IRS calculate the taxable portion of your pension and annuity payments for you for a fee of $1,000.
Your annuity provides guaranteed payments if a minimum number of payments or a minimum amount is payable, even if you and any survivor don't live to receive the minimum. You're entitled to less than five years of guaranteed payments if, barring death, the minimum amount is less than the total amount of the payments you're to receive during the first five years after payments begin.
The Simplified Method Worksheet is on page 29 of the 2021 instructions for Form 1040 and 1040-SR. Calculate the taxable amount of each one separately if you received payments from more than one partially taxable pension or annuity. Report the total on line 5b.
- Line 5a on Form 1040 or 1040-SR is for the total amount of pension and annuity payments you received during the tax year.
- You calculate that figure by adding up the amounts in box 1 of any Forms 1099-R you received from financial service providers.
- Leave line 5a blank if your pension and annuity payments were fully taxable. Enter the total amount of those payments on line 5b instead.
- You must calculate the taxable portion using either the General Rule or the Simplified Method if the payments weren't fully taxable, and the taxable portion isn't stated on a Form 1099-R.
Frequently Asked Questions (FAQs)
What are pensions and annuities?
Pensions and annuities are investment vehicles that you can use to generate a fixed income stream. Pensions are retirement savings funds offered by employers. Annuities are actually a type of insurance product. They aren't necessarily tied to retirement. Both are common sources of steady income later in life.
How much is the income tax on pensions and annuities?
You'll pay income tax on any portion of the payments that wasn't originally taxed when you made your contributions. Any employer contributions or money that's a result of account growth will be taxed at your income tax rate at the time of withdrawal. The amount will typically be automatically withheld from your payments.
How do I report income from foreign pensions on Form 1040?
Foreign pension income isn't reported with your regular U.S.-based annuity and pension income. IRS rules for reporting income from foreign retirement accounts are fairly complicated. You may have to file several forms with your tax return, depending on the type of account. Consult with a tax advisor if you're receiving foreign pension income.