Why did my early withdraw from my annuity (10% penalty tax =$2600, change my return by well over than $5000?? Went from $4200 return to owing $1300

[MichaelMc · Accepted solution]

Unfortunately, you are focused on only one aspect of the tax consequences of an early distribution from a qualified retirement plan.

Any amount distributed prior to age 59 1/2 is subject to the 10% penalty tax, which you referred to in your question. In your case, based on the $2,600 penalty tax, your actual distribution would have been $26,000. I believe you may have overlooked the fact that, if a plan has been funded with pre-tax contributions, subsequent distributions are taxed as ordinary income. In your case, the distribution resulted in an additional $26,000 being taxed as ordinary income in 2018 plus the 10% penalty for early distribution.

[dmertz]

The 10% penalty is calculated on the taxable amount.  It appears that this taxable income is falling into the 22% tax bracket, so with the 10% early-distribution penalty the distribution is adding $26,000 * 32% = $8,320 to your 2018 tax liability, only $2,600 of which is covered by the withholding from this distribution.

[dmaher01]

I understand your point and thank you for your response. However, I elected to have all of my
taxes and fees paid upfront when I took my withdrawal.  Even TurboTax says my tax on this is only 10%.  That is why I’m so confused why it impacted my return so much

[dmertz]

See my comment above.  TurboTax is indicating that the *additional* tax (the penalty) is 10%, but this is separate from the increase in your income tax liability resulting from this distribution.  There is no way for the payer to know how much your income tax liability is; that's not determined until you prepare your tax return.  The 10% withheld by the payer was simply the default tax withholding required by law, essentially a down-payment toward the overall tax liability calculated on your tax return.

[dmaher01]

Got ya.  Thanks for clearing that up.