Retirement accounts, including 401(k) plans, are designed to help people save for retirement. As such, the tax code incentivizes saving by offering tax benefits for contributions and usually penalizing those who withdraw money before the age of 59½.
Generally, anyone can make an early withdrawal from 401(k) plans at any time and for any reason. However, these distributions typically count as taxable income. If you're under the age of 59½, you typically have to pay a 10% penalty on the amount withdrawn.
Regarding the code 7 on your Form 1099-R. Does your Form 1099-R have a Code 7?
Code 7 indicates a normal distribution.
Code 1 indicates an early distribution from a retirement plan (except ROTH), and no exceptions apply (See list below).
Code 2 indicates an early distribution (Except ROTH) and an exception applies.
If you believe your Form 1099-R is incorrect, you should consult with the issuer.
There are exceptions to the 10% tax penalty for early distributions:
- Death or total and permanent disability
- Series of substantially equal periodic payments based on life expectancy
- Qualified first-time homebuyer distributions up to $10,000
- Qualified higher-education expenses
- Certain medical insurance premiums paid while unemployed
- Unreimbursed medical expenses that are more than a certain amount of your adjusted gross income
- IRS levy
- Certain distributions to qualified military reservists called to active duty
- Beneficiary of a deceased IRA Owner
- Qualified Birth or Adoption costs
Once you enter the distribution information from your 1099-R form, we'll help you check for any exceptions that could reduce the tax.
Click here for explanation of codes for Box 7 of Form 1099-R.
Click here for additional information on early withdrawals.
Click here for additional information on taking an early withdrawal from your 401(K).
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