How Much of Your Pension Check is Taxable
Just because all of your retirement check is subject to income taxes does not mean it is all taxable. If you contributed any of your own funds on a post-tax basis to your own retirement fund, such as an IRA, or to your employer's pension fund, or 401(k) fund, then a proportionate portion will be withdrawn tax free, even if you are making an early withdrawal. In general, you will compare your after-tax contributions to the total value of your retirement fund and calculate a percentage. This percentage will then be the portion of each check that is not taxable. Most retirement and pension administrators will report this taxable dollar amount to you on your yearly tax forms.
A ROTH IRA withdrawal may even be tax free. If the ROTH IRA was established five or more years earlier and the withdrawal is made after age 59-1/2, then none of the retirement check should be taxable.
For regular pension checks, most annuity withdrawals, and many government pensions, the taxable portion will usually be calculated for you. Simply look in Box 2a of your yearly 1099-R for the taxable portion of your retirement checks. If the box 2a is blank, then you will need to calculate the taxable portion yourself, using either the General Rule or the Simplified Method if your retirement checks started after 7-1-86. See the Form 1040 instructions for the Simplified Method or see IRS Publication 939 for the General Method. These methods both use your own contributions and the total pension to get a ratio to determine the non-taxable portion. Once established, these ratios tend to stay somewhat constant over the years.
Social Security and RRB Equivalent income will only become taxable when your other income reaches certain limits. A very rough estimate to use for this is to add 1/2 of your Social Security (or Equivalent) income plus all of your other taxable income. If the sum is over $32,000 (joint) or $25,000 (single), then up to 85% of your benefits may be taxable.
Also keep in mind that most funds that are timely or directly rolled over into another qualified retirement account are not taxed.