Code 3 in Box 7 of a 1099-R means that the taxpayer is on disability but under retirement age. The income will be taxed as wages, rather than on the pension line. The importance of this is that when disability pay is treated as wages, it might affect the earned income credit and the taxpayer’s ability to make an IRA contribution, because it is still considered earned income.
Code 7 means the taxpayer has reached age 59 1/2. The income will be taxed as pension income. It is no longer considered earned income.
Page 12-10, https://www.irs.gov/pub/irs-pdf/p4491.pdf
**Answers are correct to the best of my ability but do not constitute tax or legal advice.
