That's the way it works. It's the same as when you have federal tax withheld from your pay. Your "take-home pay," the paycheck that you get, is your gross pay minus the tax (and possibly other deductions). But the taxable income on your W-2 is your gross pay, before the tax is subtracted. The 1099-R works the same way. The taxable income is the gross distribution, before the tax is subtracted.
