IRS Form — Retirement Distributions
Form 1099-R — Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts
Form 1099-R is issued by retirement plan custodians to report distributions from IRAs, 401(k)s, pensions, annuities, and other retirement accounts. Box 7 contains the distribution code — the most important box on the form — which determines the tax treatment and whether the 10% early distribution penalty applies. For tax professionals, Form 1099-R is one of the most frequently mishandled forms, particularly when the distribution code is incorrect.
Key Rules and Authority
| Rule | Detail |
|---|---|
| Code 1 | Early distribution — 10% penalty |
| Code 2 | Early distribution — exception applies |
| Code 4 | Death distribution |
| Code 7 | Normal distribution — no penalty |
| Code G | Direct rollover — not taxable |
| Code H | Direct rollover from Roth to Roth |
Form 1099-R Distribution Codes — Quick Reference
| Code | Description | 10% Penalty? |
|---|---|---|
| 1 | Early distribution, no known exception | Yes |
| 2 | Early distribution, exception applies | No |
| 3 | Disability | No |
| 4 | Death | No |
| 5 | Prohibited transaction | Varies |
| 7 | Normal distribution (age 59½+) | No |
| G | Direct rollover | No |
| J | Early Roth IRA distribution | Possibly |
| Q | Qualified Roth IRA distribution | No |
Frequently Asked Questions
My client received a 1099-R with Code 1 but they qualify for an exception to the 10% penalty. What do I do?
When the 1099-R shows Code 1 (early distribution, no known exception) but the taxpayer qualifies for an exception, file Form 5329, Part I to claim the exception. Enter the exception code on Line 2 of Form 5329 to reduce or eliminate the 10% penalty. Common exceptions include: substantially equal periodic payments (Code 01), disability (Code 03), higher education expenses (Code 08 — IRA only), and first-time home purchase (Code 09 — IRA only). Do not ask the custodian to re-issue the 1099-R with Code 2 — the custodian uses Code 1 when they don't know whether an exception applies, and Form 5329 is the correct way to claim the exception on the tax return.
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