Received a 1099-R form due to getting a check as a result of winning a lawsuit. Reliance Trust Co. has agreed to pay nearly $40 million to settle an ERISA class action brought by workers who accused the investment manager of including poorly performing and costly proprietary funds in human resources services provider Insperity's retirement plan. Federal income tax was taken yet I was still dinged more money for an early distribution. Why?
The taxation of your pension distribution reported on a form 1099-R is reliant on the code entered in box 7. An early distribution will usually have a code of "1" and normally represents a distribution made before normal retirement age. If you feel the distribution was coded wrong you would have to inquire of the management of the fund the reason for it being coded the way it was. If the distribution is early, then there will normally be penalties associated with it.
Furthermore, the taxes withheld are typically 10% to 20%, which may be less than your marginal federal tax rate, so that is another reason why you may end up owing taxes on the distribution.