The above answer applies to federal retirement taxation, but does not apply to reporting PA retirement income. If your 1099R box 7 contains a 1 or a 2, it is an early distribution from a retirement plan and is taxable in PA to the extent the distribution exceeds your basis in the retirement plan.
Your basis, for PA income tax purposes, is the sum of all your contributions into the plan (may cover many years) less the sum of all your distributions from previous years. Essentially, you are to get your already taxed money back first before distributions become taxable. You do not include earnings or any employer contributions as part of your basis.
