Which psychological disorder is characterized by a significant impairment in reality testing?

The psychological disorder characterized by a significant impairment in reality testing is schizophrenia. Individuals with schizophrenia often experience psychotic symptoms such as hallucinations (hearing or seeing things that are not present) and delusions (strongly held false beliefs). These symptoms indicate a significant disruption in their ability to distinguish between what is real and what is not, thereby affecting their perception, thoughts, and interactions with reality.

In contrast, anxiety disorders primarily involve excessive fear or worry, but do not typically distort reality perception in the same profound way as schizophrenia. Obsessive-Compulsive Disorder involves intrusive thoughts and compulsions, but the individual usually remains aware that the obsessions are not true. Bipolar Disorder involves mood swings that can include depressive and manic episodes, but reality testing may not be significantly impaired during those episodes compared to the psychotic experiences seen in schizophrenia. Therefore, the defining feature of schizophrenia regarding severe impairments in reality testing makes it the correct answer.