Annuities, pensions, Roth IRAs, tax-deferred accounts and other sources of retirement income from employers are calculated at different tax rates, the IRS notes. Some are subjected to lower tax rates, are tax-free or are taxed as ordinary income.
If the taxpayer did not pay anything into the pension plan, pension payments are fully taxable, notes the IRS. Tax-deferred funds, which come from pre-tax contributions, are not considered to originate from taxpayers' payments. If the taxpayer paid for or contributed to the pension, the IRS has a calculation to determine how much of the income received is taxable. Pension income is only tax free in 12 states, U.S. News reports.