Pension and annuity distributions from qualified retirement plans are fully taxable. Your pension distribution would be taxed as ordinary income.
Any taxable distribution paid to you is subject to mandatory withholding of 20%, even if you intend to roll the distribution over later.
Early distributions (i.e. prior to age 59 1/2) are subject to the 10% Early Withdrawal penalty.
However, the IRS does make exception to the early withdrawal penalty if you are totally and permanently disabled.
You are considered disabled if you can furnish proof that you can't do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or be of a long, continued, or indefinite duration. You must have your physician complete a statement certifying that you had a permanent and total disability.
You would receive a Form 1099-R from your employer to report this on your 2023 tax return. Box 7 should have a code 2 indicating this distribution is an exception to the early withdrawal penalty. If it does not have a code 2, you would inform the IRS of your eligibility using Form 5329. This form is available in Turbo Tax. Follow the prompts when you enter your Form 1099-R.
Along with properly completing the form 5329, you should submit at least one signed letter from a licensed physician attesting to the severity of your disability. That will generally satisfy any questions IRS might otherwise have. Your tax return would have to be mailed to the IRS.
Click here for additional information regarding Pension and Annuity Income and the disability exception for the early withdrawal penalty.
Click here for additional information on early withdrawals from your pension plan.
Click here for information on Form 5329.
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