In what scenario would a pension be considered partly taxable?

A pension may be considered partly taxable when the employee contributed after-tax funds to the plan. This is because the amount that the employee contributed after taxes has already been taxed and thus is not subject to taxation again upon distribution. However, any earnings or contributions made by the employer, which were not taxed previously, will be subject to income tax when withdrawn.

In this scenario, only the portion of the pension that is attributed to the after-tax contributions is excluded from taxable income, while the remaining amount, including employer contributions and any earnings, will be taxable upon distribution. This concept is important for taxpayers to understand in order to accurately report pension income and determine their tax liability.