My tax liability greatly increases when I enter my 1099-R for a teacher pension. I retired after age 55 and am now under 59 1/2. Box 7 is code 2. Why is this happening?

[elmesfamily@emba]

I had about 12% withheld federally.

[dmertz]

Tax liability will increase because the distribution is taxable.  Whatever amount you had withheld for taxes is credited on your tax return.  Your refund or balance due could go up or down depending on how the 12% that you had withheld compares to your change in tax liability.

[MinhT1]

Withdrawals from a pension when you retire after 55, but are under 59 1/2 are exceptions for the 10% early withdrawal penalty. See this IRS document.

Code 2 in box 7 of your form 1099-R means Early Withdrawal, exception applies. TurboTax has already exempted you from the early withdrawal penalty. But the amount withdrawn is subject to income taxes.

Please understand that tax withheld is just an estimated advance payment of your taxes. The final tax amount can only be determined when you fill out your tax return. The taxes withheld serve as a credit against your tax liability. If too much tax was withheld, you'll receive a refund; otherwise, there'll be a tax due.

In your case, you may be in a higher tax bracket and the 12% of taxes withheld weren't sufficient.