What is the simplified method for pensions?

What the method does

Publication 575 describes the Simplified Method in one sentence: you figure the tax-free part of each annuity payment by dividing your cost by the total number of anticipated monthly payments. For an annuity paid over one or more lifetimes, that number comes from a table based on the annuitants’ ages on the annuity starting date. For any other annuity it is just the number of monthly payments the contract provides. Everything else on the worksheet is bookkeeping around that division.

Once the monthly tax-free amount is set it does not move. The publication says the tax-free part is figured when the annuity starts and remains the same each year even if the payment amount changes, so a cost-of-living increase does not change your exclusion; the increase is simply taxable.

Who must use it, and who cannot

You must use the Simplified Method if your annuity starting date is after November 18, 1996, you are paid from a qualified employee plan, a qualified employee annuity or a tax-sheltered annuity (403(b)), and on the annuity starting date at least one of two things is true: you are under age 75, or you are entitled to fewer than 5 years of guaranteed payments. Guaranteed payments exist when a minimum number of payments or a minimum amount is payable even if you and any survivor die early.

You cannot use it for a nonqualified plan such as a purchased commercial annuity or a private annuity. Those, and qualified-plan annuities where you were 75 or older on the starting date with payments guaranteed for at least 5 years, use the General Rule, which relies on IRS actuarial tables and is explained in Publication 939. The 2025 edition of Publication 575 does not teach the General Rule itself.

The annuity starting date and your cost

The annuity starting date is the later of the first day of the first period for which you received a payment or the date the plan’s obligations became fixed. The publication’s example: payments of a monthly annuity begin August 1 for the period starting July 1, so the starting date is July 1, and that is the date you use for the cost and the table. The starting date never changes, and it fixes the recovery period even if you first fill in the worksheet years later.

Your cost is generally your net investment as of that date. It includes after-tax contributions and employer contributions that were taxable to you when paid, and it excludes amounts withheld from your pay on a tax-deferred basis. You subtract refunded premiums and other tax-free amounts you already received. If your payments began in 2025, the payer should show your total contributions in box 9b of Form 1099-R.

The worksheet, line by line

Line 1 is the total pension received this year, which also goes into line 5a. Line 2 is your cost. Line 3 is the number of expected monthly payments from Table 1 or Table 2. Line 4 is cost divided by line 3, the monthly tax-free amount. Line 5 multiplies line 4 by the months paid this year. Line 6 is what you recovered tax free in earlier years. Line 7 subtracts line 6 from your cost. Line 8 is the smaller of lines 5 and 7. Line 9, line 1 minus line 8, is the taxable amount that goes to line 5b. Lines 10 and 11 track what you have recovered and what remains for next year.

If you filled in the worksheet last year, skip lines 3 and 4 and carry last year’s line 4 forward. Keep each year’s worksheet, because line 6 depends on it.

Tables 1 and 2 for starting dates after November 18, 1996

Table 1, for a single-life annuity, uses your age on the starting date: 55 or under, 360 payments; 56 to 60, 310; 61 to 65, 260; 66 to 70, 210; 71 or older, 160. Table 2, for an annuity payable over more than one life with a starting date after 1997, uses combined ages: 110 or under, 410; 111 to 120, 360; 121 to 130, 310; 131 to 140, 260; 141 or older, 210. The publication shows different numbers for starting dates before November 19, 1996, which the calculator here does not cover. For a fixed-period annuity, line 3 is the number of monthly payments in the contract.

Worked example from the publication

Bill Smith, 65, starts a joint and survivor annuity on January 1, 2025 with his wife, also 65. He contributed $31,000 after tax and received nothing before the starting date. Combined ages are 130, so Table 2 gives 310 payments. His monthly tax-free amount is $31,000 ÷ 310 = $100. He receives $1,200 a month, $14,400 for the year, excludes $1,200, and reports $13,200 taxable. $29,800 of cost remains to recover. Enter those figures above to reproduce each line. After 310 payments his whole payment becomes taxable, and if both die sooner the unrecovered cost is an itemized deduction on the last survivor’s final return.

Survivors, shared annuities and limits

A survivor receiving payments under a joint and survivor annuity uses the same tax-free amount the retiree figured at the starting date. If several annuitants are paid at once, each excludes a pro rata share of the monthly tax-free amount: divide your monthly payment by everyone’s total monthly payments and multiply by line 4. This page is general information about a federal publication; payments from some plans, public safety officers’ insurance premiums and annuities from before 1987 follow special rules.

Sources

• IRS Publication 575, Pension and Annuity Income (2025): Simplified Method; Cost (Investment in the Contract); Partly Taxable Payments (exclusion limit); Worksheet A and Tables 1 and 2. Read November 2, 2026.

Edition read: Publication 575 (2025), for use in preparing 2025 returns. Dollar limits and dates in this publication are for 2025; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it.