How you figure the taxable amount of a nonperiodic distribution depends on whether it is made before the annuity starting date, or on or after the annuity starting date. If it is made before the annuity starting date, its tax treatment also depends on whether it is made under a qualified or nonqualified plan. If it is made under a nonqualified plan, its tax treatment depends on whether it fully discharges the contract, is received under certain life insurance or endowment contracts, or is allocable to an investment you made before August 14, 1982.

You may be able to roll over the taxable amount of

TIP a nonperiodic distribution from a qualified retire-

ment plan into another qualified retirement plan or a traditional IRA tax free. See Rollovers , later. If you don’t make a tax-free rollover and the distribution qualifies as a lump-sum distribution, you may be able to elect an op- tional method of figuring the tax on the taxable amount. See Lump-Sum Distributions , later.

Annuity starting date. The annuity starting date is either the first day of the first period for which you receive an annuity payment under the contract or the date on which the obligation under the contract becomes fixed, whichever is later.

Distributions of employer securities. If you receive a distribution of employer securities from a qualified retirement plan, you may be able to defer the tax on the net unrealized appreciation (NUA) in the securities. The NUA is the net increase in the securities’ value while they were in the trust. This tax deferral applies to distributions of the employer corporation’s stocks, bonds, registered debentures, and debentures with interest coupons attached.

If the distribution is a lump-sum distribution, tax is deferred on all of the NUA unless you choose to include it in your income for the year of the distribution.

A lump-sum distribution for this purpose is the distribution or payment of a plan participant’s entire balance (within a single tax year) from all of the employer’s qualified plans of one kind (pension, profit-sharing, or stock bonus plans) but only if paid:

Because of the plan participant’s death;
After the participant reaches age 59 ¹ /2;
Because the participant, if an employee, separates from service; or
After the participant, if a self-employed individual, becomes totally and permanently disabled.

If you choose to include NUA in your income for

TIP the year of the distribution and the participant was

born before January 2, 1936, you may be able to figure the tax on the NUA using the optional methods. See Lump-Sum Distributions , later.

If the distribution isn’t a lump-sum distribution, tax is deferred only on the NUA resulting from employee contributions other than deductible voluntary employee contributions.

The NUA on which tax is deferred should be shown in box 6 of the Form 1099-R you receive from the payer of the distribution.

When you sell or exchange employer securities with tax-deferred NUA, any gain is long-term capital gain up to the amount of the NUA that isn’t included in your basis in the employer securities. Any gain that is more than the NUA is long-term or short-term gain, depending on how long you held the securities after the distribution.

Your basis in the employer securities is the total of the following amounts.

Your contributions to the plan that are attributable to the securities.
Your employer’s contributions that were taxed as ordinary income in the year the securities were distributed.
Your NUA in the securities that is attributable to employer contributions and taxed as ordinary income in the year the securities were distributed.

How to report. Enter the total amount of a nonperiodic distribution on Form 1040, 1040-SR, or 1040-NR, line 5a. Enter the taxable amount of the distribution on Form 1040, 1040-SR, or 1040-NR, line 5b. However, if you make a tax-free rollover or elect an optional method of figuring the tax on a lump-sum distribution, see How to report in the discussions of those tax treatments, later.

Distribution On or After Annuity Starting Date

If you receive a nonperiodic payment from your annuity contract on or after the annuity starting date, you must generally include all of the payment in gross income. For example, a cost-of-living increase in your pension after the annuity starting date is an amount not received as an annuity and, as such, is fully taxable.

Reduction in subsequent payments. If the annuity payments you receive are reduced because you received a nonperiodic distribution, you can exclude part of the nonperiodic distribution from gross income. The part you can exclude is equal to your cost in the contract reduced by any tax-free amounts you previously received under the contract, multiplied by a fraction. The numerator is the reduction in each annuity payment because of the

16 Publication 575 (2025)

nonperiodic distribution. The denominator is the full unreduced amount of each annuity payment originally provided for.

Single-sum payment in connection with the start of annuity payments. If you receive a single-sum payment on or after your annuity starting date in connection with the start of annuity payments for which you must use the Simplified Method, treat the single-sum payment as if it were received before your annuity starting date. (See Sim- plified Method under Taxation of Periodic Payments, earlier, for information on its required use.) Follow the rules discussed under Distribution Before Annuity Starting Date From a Qualified Plan , later.

Distribution in full discharge of contract. You may receive an amount on or after the annuity starting date that fully satisfies the payer’s obligation under the contract. The amount may be a refund of what you paid for the contract or for the complete surrender, redemption, or maturity of the contract. Include the amount in gross income only to the extent that it exceeds the remaining cost of the contract.

Distribution Before Annuity Starting Date From a Qualified Plan

If you receive a nonperiodic distribution before the annuity starting date from a qualified retirement plan, you can generally allocate only part of it to the cost of the contract. You exclude from your gross income the part that you allocate to the cost. You include the remainder in your gross income.

For this purpose, a qualified retirement plan is a:

Qualified employee plan (or annuity contract purchased by such a plan),
Qualified employee annuity plan, or
Tax-sheltered annuity plan (403(b) plan).

Use the following formula to figure the tax-free amount of the distribution.

$50,000 x

$10,000

= $5,000 $100,000

Tax-free

Amount x received

Account balance amount

Cost of contract

For this purpose, your account balance includes only amounts to which you have a nonforfeitable right (a right that can’t be taken away).

Example. Ann Brown received a $50,000 distribution from her retirement plan before her annuity starting date. She had $10,000 invested (cost) in the plan. Her account balance was $100,000. She can exclude $5,000 of the $50,000 distribution, figured as follows.

Defined contribution plan. A defined contribution plan is a plan in which you have an individual account. Your benefits are based only on the amount contributed to the account and the income, gains or losses, etc., which may be allocated to that account. Under a defined contribution plan, your contributions (and income allocable to those contributions) may be treated as a separate contract for figuring the taxable part of any distribution. The employer contributions (and income allocable to those contributions) wouldn’t be considered part of that separate contract.

Example. Ryan participates in a defined contribution plan that treats employee contributions and earnings allocable to them as a separate contract. He received a non-annuity distribution of $5,000 before his annuity starting date. He had made after-tax contributions of $10,000. The earnings allocable to his contributions were $2,500. His employer also contributed $10,000. The earnings allocable to the employer contributions were $2,500.

To determine the tax-free amount of Ryan’s distribution, use the same formula shown earlier. However, because employee contributions are treated as a separate contract, the account balance would be the total of Ryan’s contributions and allocable earnings.

Thus, the tax-free amount would be $5,000 × ($10,000 ÷ $12,500) = $4,000. The taxable amount would be $1,000 ($5,000 − $4,000).

If the employee contributions weren’t treated as a separate contract, the tax-free amount would be $2,000 ($5,000 × ($10,000 ÷ $25,000)) and the taxable amount would be $3,000 ($5,000 − $2,000).

Plans that permitted withdrawal of employee contri- butions. If you contributed before 1987 to a pension plan that, as of May 5, 1986, permitted you to withdraw your contributions before your separation from service, any distribution before your annuity starting date is tax free to the extent that it, when added to earlier distributions received after 1986, doesn’t exceed your cost as of December 31, 1986. Apply the allocation described in the preceding discussion only to any excess distribution.

Distribution Before Annuity Starting Date From a Nonqualified Plan

If you receive a nonperiodic distribution before the annuity starting date from a plan other than a qualified retirement plan (nonqualified plan), it is allocated first to earnings (the taxable part) and then to the cost of the contract (the tax-free part). This allocation rule applies, for example, to a commercial annuity contract you bought directly from the issuer. You include in your gross income the smaller of:

The nonperiodic distribution, or

Publication 575 (2025) 17

The amount by which the cash value of the contract (figured without considering any surrender charge) immediately before you receive the distribution exceeds your investment in the contract at that time.

Example. You bought an annuity from an insurance company. Before the annuity starting date under your annuity contract, you received a $7,000 distribution. At the time of the distribution, the annuity had a cash value of $16,000 and your investment in the contract was $10,000. The distribution is allocated first to earnings, so you must include $6,000 ($16,000 − $10,000) in your gross income. The remaining $1,000 ($7,000 − $6,000) is a tax-free return of part of your investment.

Exception to allocation rule. Certain nonperiodic distributions received before the annuity starting date aren’t subject to the allocation rule in the preceding discussion. Instead, you include the amount of the payment in gross income only to the extent that it exceeds the cost of the contract.

This exception applies to the following distributions.

Distributions in full discharge of a contract that you receive as a refund of what you paid for the contract or for the complete surrender, redemption, or maturity of the contract.
Distributions from life insurance or endowment contracts (other than modified endowment contracts, as defined in section 7702A of the Internal Revenue Code) that aren’t received as an annuity under the contracts.
Distributions under contracts entered into before August 14, 1982, to the extent that they are allocable to your investment before August 14, 1982.

If you bought an annuity contract before August 14, 1982, and made investments both before and after August 14, 1982, the distributed amounts are allocated to your investment or to earnings in the following order.

The part of your investment that was made before August 14, 1982. This part of the distribution is tax free.
The earnings on the part of your investment that was made before August 14, 1982. This part of the distribution is taxable.
The earnings on the part of your investment that was made after August 13, 1982. This part of the distribution is taxable.
The part of your investment that was made after August 13, 1982. This part of the distribution is tax free.

Form 1099-INT will show the total interest accrued, including the part you reported when the bonds were distributed to you. For information on how to adjust your interest income for U.S. savings bond interest you previously reported, see How To Report Interest Income in chapter 1 of Pub. 550, Investment Income and Expenses.