IRS Pub 939 – General Rule for Pensions and Annuities – Retirement planning involves more than just saving—understanding how your pensions and annuities are taxed is crucial for maximizing your income. If you’re dealing with retirement distributions, IRS Publication 939, titled “General Rule for Pensions and Annuities,” provides essential guidance on calculating the taxable and tax-free portions of your payments. This comprehensive resource is particularly useful for nonqualified plans or certain qualified plans where the Simplified Method doesn’t apply. In this article, we’ll break down the key elements of IRS Pub 939, explain who should use it, and walk through the calculations to help you navigate your 2026 tax obligations effectively.
Whether you’re a retiree receiving periodic payments or a survivor beneficiary, mastering the General Rule can help you recover your investment tax-free while reporting taxable income accurately. Let’s dive into the details.
What Is IRS Publication 939?
IRS Publication 939 outlines the General Rule for determining the tax treatment of pensions and annuities. Unlike the Simplified Method (covered in Pub. 575), the General Rule applies a more detailed approach to figure out how much of each payment is a tax-free return of your investment (also called your “cost” or “basis”) and how much is taxable ordinary income.
The publication covers various types of annuities, including fixed-period, single-life, joint and survivor, and variable annuities. It emphasizes that pensions are typically fixed payments based on years of service and compensation, while annuities are series of payments under a contract. Key reminders include the application of the Net Investment Income Tax (NIIT) on nonqualified annuities since 2013, and exclusions for IRAs, life insurance, civil service annuities, Social Security, or 403(b) plans—which are addressed in other IRS publications.
The annuity starting date is critical, as it determines your age for actuarial tables and when the exclusion ratio begins. For deferred annuities, this is when payments start.
Who Should Use the General Rule for Pensions and Annuities?
Not everyone needs the General Rule—it’s primarily for:
- Nonqualified plans: Such as private annuities or nonqualified employee retirement plans.
- Qualified plans under specific conditions:
- Annuity starting dates between July 1, 1986, and November 18, 1996, where the Simplified Method isn’t elected or available.
- Starting dates after November 18, 1996, if the recipient is 75 or older and payments are guaranteed for at least 5 years.
If your plan qualifies for the Simplified Method, use that instead for easier calculations. The General Rule is ideal for retirees, survivors, or those with variable payments, handling both periodic and nonperiodic distributions. However, it doesn’t apply to government annuities or deferred qualified plans without specific elections.
Key Concepts in Taxing Pensions and Annuities
To apply the General Rule, grasp these foundational terms:
- Investment in the Contract (Net Cost): This is your total contributions or premiums minus any refunds, rebates, dividends, loans, or prior tax-free amounts. Adjustments may include:
- Excludable contributions from foreign employment.
- Up to $5,000 death benefit exclusion for deaths before August 21, 1996.
- Reductions for refund features, calculated using actuarial tables.
- Expected Return: The total amount you anticipate receiving over the annuity’s life, capped post-1986 to ensure you don’t recover more than your net cost tax-free. It’s calculated as your annual payment multiplied by an actuarial multiple from IRS tables.
- Exclusion Ratio: Your net investment divided by the expected return (rounded to three decimals). This ratio determines the tax-free portion of each payment.
For variable annuities, use the fair market value to compute investment and expected return. Disability payments may qualify for the credit for the elderly or disabled via Schedule R.
How to Calculate the Tax-Free Portion Using the General Rule?
Follow these steps to apply the General Rule:
- Determine Adjusted Investment: Subtract any refund value or death exclusion from your net cost.
- Calculate Expected Return: Multiply your periodic payment by the appropriate actuarial multiple (adjusted for payment frequency, e.g., add 0.1 for quarterly payments with a 1-month delay).
- Compute Exclusion Ratio: Divide adjusted investment by expected return.
- Find Tax-Free Amount: Multiply the ratio by each payment (or annual total).
- Taxable Amount: Subtract the tax-free portion from the total payment.
For part-year payments, prorate accordingly. If payments increase (unless scheduled), the increase is fully taxable. In cases of under-recovery or early death, refigure the ratio or claim unrecovered investment as a capital loss.
Post-1986 rules limit tax-free recovery to your net cost, with any excess deductible in the final year. Pre-1987 annuities have no such limit.
Actuarial Tables and Worksheets in Pub 939
IRS Pub 939 includes unisex actuarial tables (post-June 1986) for calculating expected return multiples, which decrease with age. For example:
- Table V (Single-Life): Age 65 multiple is about 19.6 years.
- Table VI (Joint and Survivor): For ages 65 and 65, the multiple is 14.9.
- Table VII (Refund Percentages): Used to adjust for guarantees, e.g., 4% for a 60-year-old with a 10-year guarantee.
Worksheets like A (single annuitant), B/C (joint), and others guide you through inputs like age, payment amount, and investment to compute the ratio. Separate pre- and post-1986 contributions if applicable, and attach a statement to your return.
Special Cases and Adjustments for Pensions and Annuities
- Joint and Survivor Annuities: Use separate calculations if survivor payments differ.
- Refund Features: Reduce net cost by the present value of potential refunds.
- Elections: Irrevocable choices for treating payments as post-1986 or using separate tables.
- Nonqualified Plans: Subject to Section 72(t) minimum distribution rules.
- Variable Annuities: Tax-free based on investment divided by expected life multiples.
For complex scenarios, request an IRS ruling (with user fees via Rev. Proc. 2025-4 or 2025-1) by providing contract details and Form 1099-R.
Examples of Applying the General Rule
To illustrate:
- Single-Life Example: A 65-year-old with a $10,000 investment receives $500 monthly. Expected return: $500 × 12 × 19.6 = $117,600. Exclusion ratio: 0.085. Annual tax-free: ~$510; taxable: ~$5,490.
- Joint-Life Example: Ages 65 and 70, $20,000 investment, $1,000 annual payment. Multiple: 12.9. Expected: $12,900. Ratio: ~1.55 (potentially full tax-free if over 1).
These examples highlight how age and investment impact taxation.
Updates for the 2026 Tax Year
Revised in December 2025, Pub 939 applies to tax years beginning after December 31, 2025. New emphases include electronic payments and impacts from the One Big Beautiful Bill Act (P.L. 119-21, July 4, 2025). Always check IRS.gov for the latest, as historical rules (e.g., pre-1986) may still apply in elections.
Download IRS Pub 939 PDF
For the full details, download the official IRS Publication 939 PDF here: https://www.irs.gov/pub/irs-pdf/p939.pdf.
Final Thoughts on Managing Retirement Income Taxes
Navigating the General Rule in IRS Pub 939 ensures you’re not overpaying taxes on your pensions and annuities. By understanding your investment recovery and using the provided tables and worksheets, you can file confidently. Consult a tax professional for personalized advice, and visit IRS.gov for tools like the Interactive Tax Assistant. Proper planning today means more financial security in retirement.