1099-R - Code 2

[Hoosier]

Looking at a Form 1099-R with Distribution Code 2. Box 1 has $2,000 for gross distribution but Box 2a is blank. Box 2b is checked for Taxable Amount Not Determined. My initial thoughts are that the taxable amount will be the same as Box 1 and will appear on page 1 of the 1040 Lines 16a and 16b. However, since the distribution code is 2 (Early Distribution, Exception Applies), it looks like the $2,000 gross distribution is not subject to penalty on 5329. Is it reasonable to make these assumptions or should I dig deeper? Client doesn't really understand when questioned.

[Koss]

Code 2

In most cases, Code 2 does indeed mean that the 10% penalty is not applicable.

This code is sometimes used when the taxpayer is "retired on disability," or when they qualify for some other type of early retirement program.

Unless the distribution code is an outright error by the payer, I think you can safely assume that the distribution is not subject to the penalty.

The fact that the taxable amount is not determined is a bit more complicated. In many cases, the entire amount is in fact taxable. But sometimes it isn't. Some portion of the distribution may be a nontaxable recovery of the taxpayer's original contributions to the plan. The checkbox indicates that the plan administrator didn't have enough information to determine what portion is taxable. Or at least that's what it's supposed to mean.

Good luck. You might start by asking the client if he ever contributed any money to the plan...

BMK

[taxmom34]

i had a client this week with code 2 , when questioned, he qualified for both exception 1 and 2, i used exception 2. employer closed plant two years ago, client was 59 1/2 at time, and just withdrew in 2008 some of his monies.

[David1980]

With a code 2 you are not even required to file Form 5329.

[Jesse]

I would dig deeper. Find out if it is indeed a distribution that qualifies for an exception or if there is an error on the 1099-R. If it indeed is subject to early withdrawal penalty and it is coded incorrect they may receive a corrected 1099-R down the road. This has happened to one of my clients, but we reported it correctly and when he received the corrected 1099-R we didn't need to worry about it.

[JohnH]

The fact that the taxable amount is not determined is a bit more complicated. In many cases, the entire amount is in fact taxable. But sometimes it isn't. Some portion of the distribution may be a nontaxable recovery of the taxpayer's original contributions to the plan. The checkbox indicates that the plan administrator didn't have enough information to determine what portion is taxable. Or at least that's what it's supposed to mean.

Good luck. You might start by asking the client if he ever contributed any money to the plan...

BMK

You're exactly right. In my experience, most of the time when the "taxable amount not determined" box is checked, it usually means the trustee was too lazy to do their job properly. They can find plenty of time for the sales rep to talk the client into buying their product, and they're willing to expend all the time & effort necessary to get the money under their control. But they will expend zero effort in trying to obtain basis info or to even let the client know there's a problem. Then 5-20 years later they just pop out a 1099-R which basically says "Sorry chump, you're on your own with this basis thing. Just pay tax on all of it if you can't figure it out yourself."

I've fought this battle before (have one going on right now that's taken 2 years and still isn't straightened out) and I have a generally low opinion of the parties involved.

[Gene V]

I have a client that is over 59 ½, retired when he was 56, original 1099R was code 2, and still getting code 2 in box 7, should be code 7 when he turn 59 ½--- company that issue the 1099R (state street bank) said; since it doesn’t effect there tax, they where not going to change the code. There excuse—too much work trying to find and change all the people that turns 59 ½, etc.