Most pensions are non contributory non contributory

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Most pensions are non-contributory. Non-contributory means that all of the funding to the pension plan was done with before- tax dollars (employer’s and employee’s contributions were not included in the taxable income of the employee at the time of contribution). Withdrawals of non-contributory pension funds are fully taxable. For a non-contributory pension plan, there would be no “cost” to the recipient in the numerator of the fraction above.
Annuities that are purchased with after-tax dollars (purchased insurance annuities) follow the above formula. A similar (although not identical) formula is followed for determining the amount to exclude from an IRA distribution where a traditional IRA was at least partially funded with non-deductible contributions. Although Roth IRAs are funded with after-tax dollars, withdrawals from them may be fully non-taxable if certain conditions are met by the taxpayer. 2. Annuities and pensions starting after November 18, 1996, use the simplified method described above to determine the taxable portion of the payments. 3. Even if the taxpayer outlives the calculated life expectancy, only the actual cost of the annuity is excluded from income. 4. If the taxpayer dies before the entire cost is recovered tax free, any unrecovered cost is deductible on the decedent's final income tax return.
2. Certain prizes properly transferred to qualifying charitable organizations will not be included in gross income. 3. Also certain employee safety or longevity achievement awards of relatively small value are excludable if they are not a form of disguised compensation.

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