Sam retired last year and will receive annuity payments for life from his employer's qualified retirement plan of $30,000 per year starting this year.During his years of employment,Sam contributed $130,000 to the plan on an after-tax basis. Based on IRS tables,his life expectancy is 260 months.All of the contributions were on a pre-tax basis.This year,Sam will include what amount in income?
A)0
B)$6,000
C)$24,000
D)$30,000

Question

Quizplus · Accepted Answer

Sam will have to include a portion of his annuity payments in income each year because he contributed to the plan on a pre-tax basis. To determine the taxable portion of the payments, Sam must use the Simplified Method provided by the IRS. Using this method, Sam would divide his after-tax contributions ($130,000) by his life expectancy in months (260) to determine his exclusion ratio, which is 50%. This means that 50% of each annuity payment will be excluded from income and the other 50% will be taxable. Therefore, his taxable income for this year will be $15,000 (which equals 50% of the $30,000 annuity payment). Sam will have to pay taxes on this amount when he files his tax return.

Sam Retired Last Year and Will Receive Annuity Payments for Life