Taxpayer received a 1099R for $ 38000 (100%) taxable shown in box 1 and 2a) in 2008 with code 1 in box 7 and an X in box for IRA. The distribution was an immediate 5 yr annuity from a Sec 457B plan that was rollover to an IRA when the employee terminated service in Oct 2007 at age 58 and ½. The employer refused to allow the terminated employee to do the 5 yr annuity directly from within the 457 plan and would not allow the employee to leave the funds in the plan until she reached 59 and ½. The payments began in Jan 2008. Was the 1099R prepared correctly? Does exception 2 for a Sec 457 plan not apply when the funds are rolled over to an IRA under the circumstances described above? At a minimum would not the taxpayer be able to exclude the payments received after age 59 and ½ by filing Form 5329 and using a code 12 exception with the excluded amount reported on line 2 of the 5329? Is there any way to avoid the 10% penalty completely? I would appreciate input on this. Thanks in advance
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