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retirement benefit and retired at age 60, his annual recovery would be $480. annually ($40. per month). The actual amount received each year as a benefit in excess of $480. would be taxed as ordinary income. The taxable portion would vary each year due to fluctuations in fund value. If the employee survived beyond 18.2 years he would still be permitted to exclude $480. annually. 

To summarize: 

Pension payments toward which an employee has made no contributions are taxed as ordinary income. 

Where an employee has contributed, he is entitled to recover his contributions tax free under one of two rules. 

If his personal contributions will prospectively be recovered within three years, all sums are deemed to consist of employee money until recovery is complete. 

If his personal contributions will not be recovered within three years, he will exclude from the income on which he must pay tax a portion of each payment, based on his life expectancy. 

Robert E. Fulton
Vice President
United States Trust Company of New York

January 1, 1965