Most pension income is taxable as ordinary income, but the amount you pay depends on the type of pension, your total income, and your filing status

When you receive a pension check, the IRS treats it as income. That means you will owe federal income tax on it, and possibly state income tax depending on where you live. The tax you pay is calculated the same way as wages — based on tax brackets that change each year. However, some pensions are taxed differently than others, and some states do not tax pension income at all.

The key question is whether your pension came from a may have access to retirement plan (like a traditional 401(k) or defined-benefit pension from an employer) or a non-may have access to plan. may have access to plans follow federal tax rules. Non-may have access to plans — which are rare — may have different treatment. Most people with pensions have may have access to plans, so most pension income is taxable.

Key Takeaways

  • Federal income tax applies to most pension payments, calculated using your tax bracket for the year you receive the money.
  • You can have taxes withheld from your pension check, or you can pay estimated taxes quarterly — the IRS expects payment either way.
  • Some states do not tax pension income at all, while others tax it fully; a few states exempt military or government pensions only.
  • If you contributed to your pension with after-tax dollars, part of each payment is not taxed; your pension provider should tell you what percentage.
  • Social Security and pension income together can push you into a higher tax bracket, so you may owe more tax than you expect.

Federal income tax on pension payments

The IRS taxes pension income as ordinary income, meaning it is taxed at the same rates as wages. In 2024, those rates range from 10 percent to 37 percent depending on your total income and filing status. Your pension payment is added to any other income you have — Social Security, investment earnings, part-time work — and your total determines your tax bracket.

When your pension starts, your plan administrator will ask you to complete a W-4P form (Withholding Certificate for Pension or Annuity Payments). This form tells them how much federal tax to withhold from each check. You can choose to have no tax withheld, a flat dollar amount withheld, or a percentage withheld. If you do not withhold enough, you will owe the difference when you file your tax return. If you withhold too much, you will receive a refund.

Many people choose to have taxes withheld so they do not face a large bill at tax time. Others prefer to withhold nothing and pay estimated taxes quarterly using Form 1040-ES. Either way, you are responsible for paying the tax — the IRS does not care which method you use, only that the tax gets paid.

State income tax on pensions

State tax treatment of pensions varies widely. Nine states — Alaska, Florida, Illinois, Mississippi, Nevada, South Dakota, Tennessee, Texas, and Washington — do not tax income at all, so pension income is not taxed there. Another group of states taxes pension income but offers partial or full exemptions for certain types of pensions.

Pennsylvania, for example, does not tax income from pensions or annuities, but does tax other retirement income like 401(k) withdrawals. New York exempts pensions for people over 59½ but taxes them for younger retirees. Some states exempt military pensions or government employee pensions but tax private-sector pensions. A few states exempt all pension income above a certain age, usually 62 or 65.

If you move to a new state after you start receiving a pension, check that state's rules. Some states tax pensions based on where you lived when you earned the money, not where you live now. Others tax based on your current residence. Your state tax return instructions or your state's revenue department website will clarify the rule for your situation.

The taxable portion if you contributed after-tax money

If you paid part of your pension contributions with money that was not deducted from your taxable income — called after-tax contributions — then part of each pension payment is not taxed. This is uncommon in modern plans but does happen, especially in older defined-benefit pensions or if you made voluntary contributions beyond the plan limit.

Your pension provider calculates your exclusion ratio, which is the percentage of each payment that represents your after-tax contributions. They will tell you this ratio and use it to determine how much of your payment is taxable. For example, if your exclusion ratio is 20 percent, then 20 percent of each check is not taxed and 80 percent is. You will see this on your 1099-R form, which is the tax document the pension plan sends to you and the IRS.

Do not try to calculate this yourself. Your plan administrator is required by law to do it correctly. If you disagree with the amount they report, contact them and ask for an explanation. If they cannot resolve it, you can file Form 8606 with your tax return to report the correct amount.

How Social Security and pension income interact

If you receive both a pension and Social Security, the combination can push you into a higher tax bracket and make part of your Social Security taxable. This happens because the IRS uses a formula called combined income to determine whether Social Security is taxable. Combined income includes your adjusted gross income plus half your Social Security benefits plus any tax-exempt interest.

For example, if you are single and your combined income is between $25,000 and $34,000, up to 50 percent of your Social Security is taxable. If it is over $34,000, up to 85 percent is taxable. These thresholds have not changed since 1984, so they affect more retirees now than they did decades ago. A pension payment that seems modest on its own can push your combined income over a threshold and make your Social Security taxable.

This is one reason to think carefully about withholding. If you have both a pension and Social Security, you may want to increase withholding from your pension to cover the tax on both income sources, rather than discovering at tax time that you owe money.

Withholding and estimated taxes

When you start your pension, you will receive a W-4P form. Complete it carefully. If you are married and both spouses have pension income, or if you have other income sources, the standard withholding calculation may not work for you. In those cases, you can use the IRS Withholding Calculator on the IRS website to figure out the right amount to withhold.

If you choose not to withhold taxes from your pension, you must pay estimated taxes. This means sending the IRS a payment four times a year — on April 15, June 15, September 15, and January 15 — using Form 1040-ES. If you do not pay enough through withholding or estimated taxes, you may owe a penalty when you file your return, even if you ultimately do not owe any tax.

You can change your withholding at any time by submitting a new W-4P to your pension plan. If you realize mid-year that you are not withholding enough, submit a new form right away so the plan can adjust future payments.

Tax forms and what to keep

Your pension plan will send you a Form 1099-R by January 31 each year. This form shows the total amount you received, how much federal tax was withheld, and the taxable amount. Keep a copy for your records. You will need it to file your tax return, and you may need it if the IRS ever questions your return.

If you receive payments from more than one pension — for example, from two different employers or from both a pension and an annuity — you will receive a separate 1099-R for each one. Add them all together when you calculate your total income for the year.

If you roll your pension into an IRA or another retirement plan, the rules change. A direct rollover (where the money goes straight from the pension plan to the new plan) is not taxed. A distribution to you that you then roll over within 60 days is taxed in the year you receive it, unless you roll it over. Keep records of any rollover you make, because you will need to report it on your tax return.

Frequently Asked Questions

Do I have to pay taxes on my entire pension payment?

Usually yes, unless you made after-tax contributions to your pension plan. Your 1099-R form will show the taxable amount. If you contributed after-tax money, your plan will calculate an exclusion ratio that reduces the taxable portion. Check your 1099-R to see if an exclusion ratio applies to you.

What happens if I do not withhold enough tax from my pension?

You will owe the difference when you file your tax return. If you owed more than $1,000 and did not pay estimated taxes, you may also owe a penalty for underpayment. To avoid this, adjust your W-4P now or start paying estimated taxes quarterly.

Can I avoid paying tax on my pension by moving to a state with no income tax?

You will still owe federal income tax no matter where you live. Some states do not tax pension income, so moving to one of those states would save you state tax. However, you cannot avoid federal tax by moving, and some states tax based on where you earned the pension, not where you live now.

Is my military pension taxed differently?

Military pensions are taxed as ordinary federal income like any other pension. However, some states exempt military pensions from state income tax even if they tax other pensions. Check your state's rules. Military retirees may also be able to exclude a portion of their pension under certain conditions — ask your tax preparer or the IRS.

What if I receive a lump-sum pension payment instead of monthly checks?

A lump-sum payment is taxed the same way as monthly payments — as ordinary income in the year you receive it. The entire amount is added to your income for that year, which may push you into a higher tax bracket. Consider whether you can roll it into an IRA to defer the tax, or spread the payment over time if your plan allows it.