In this case, TurboTax saying that none of the distribution is taxable is an indication that entry is being treated as a rollover. The message actually has nothing to do with a 10% early-distribution penalty because the Form 1099-R has code 7, not code 2. That suggestion I made about that message having anything to do with this penalty was only speculation on my part based on incomplete information at the time.
If TurboTax gives the message saying that the amount indicated as rolled over is not taxable yet it still appears on Form 1040 line 4b, I have no explanation for that. I know of nothing that can cause that behavior by TurboTax.
