Tax obligation

Funds withdrawn from an annuity, particularly those accumulated through a union retirement plan, are generally subject to federal income tax. This is because contributions to such plans, and the earnings they generate, are typically tax-deferred. When these funds are distributed, they are taxed as ordinary income in the year of withdrawal. Your advice that he needs to pay tax on his retirement withdrawal, regardless of what he spends the money on, is correct. The taxability of the withdrawal itself is separate from how the money is subsequently used. Additionally, if the individual is under age 59½, the withdrawal may also be subject to an additional 10% early distribution penalty, unless a specific exception applies. Any deductions for farm equipment would be considered in the context of the farm's business income and expenses, independent of the tax on the annuity withdrawal.