I'm no tax expert but it would appear Code 1 is incorrect. I would question the broker.
I assume you did a hands off known as an "in-kind" transfer between the 401k and a taxable brokerage account.
In support of Code 2, check this IRS website.
https://www.irs.gov/pub/irs-prior/i1099r--2025.pdf
Then go to Table 1 on page 18, it states:
2—Early distribution, exception applies.
• A distribution from a qualified retirement plan after separation from service in
or after the year the participant has reached age 55.
A 401k is a qualified retirement plan.
It would appear the 1099-R is incorrectly showing Code 1 from Table 1. Perhaps because they didn't consider Code 2.
1—Early distribution, no known exception.
Use Code 1 only if the participant has not reached age 591/2, and you do not
know if any of the exceptions under Code 2, 3, or 4 apply.
Also, if you look at this IRS website:
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-exceptions-to-tax-o...
It states:
Exceptions to the 10% additional tax
"the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit or defined contribution plan)"
