Q. If one retires under the MRA +10 provisions with a penalty, how does the Internal Revenue Service view this situation as far as determining your income? Are there any special tax consequences related to the penalty?
Simplified example: John Smith retires at age 56 with 25 years of service and his pension before the penalty is $2,000 per month. He now takes a 30 percent reduction (5 percent for each year under 62) and receives $1,400 per month. How does the IRS treat the income and penalty?
A. You will be taxed on what you actually receive, not what you would have received but for the age penalty.