Learn how non-periodic pension payments are taxed at the federal level below. 

Non-periodic payments are also termed “amounts not received as an annuity.” They include all payments other than periodic payments. The amount of such payments that are subject to tax depends on when the payments are made in relation to the annuity starting date. If they are made before the annuity starting date, their tax treatment depends on the type of contract or transaction from which they result.

A plan participant who receives a nonperiodic payment from an annuity contract on or after the annuity starting date is generally fully taxable on the amount. A cost-of-living increase in a pension after the initial starting date is considered “an amount not received as an annuity”; thus, it is fully taxable.

Such payments are only partially taxable because part of the payment is allocated to investment in the contract.  To figure the non-taxable portion, use the following formula (determine “balance in the account” on the date the payment is received).

For distributions from plans other than qualified retirement plans, generally the payment is only partially taxable.  Allocate first to earnings to compute the taxable part, then to investment in the contract to figure the non-taxable part.  This type of treatment generally applies to commercial annuity contracts purchased directly by the taxpayer.  The taxable portion is the smaller of: (a) the nonperiodic distribution, or (b) the excess of the cash value of the contract (figure this without regard to any surrender charge) just before receipt of the distribution over the participant’s investment in the contract at that time.