It will be taxed but if you are under 59 1/2 you can avoid the 10% Early Withdrawal Penalty on up to $10,000. Here are my old notes, hope they get you there.....
The questions about exceptions to the penalty do not come after entering the 1099-R. Rather, you will see that area after you have finished all the Deductions and Credits section.
To enter the exception, starting from the "Federal Taxes" tab, select "Deductions & Credits". Select "Choose Explore on my own or I'll choose what to work on ." At the end of the Deductions & Credits section, select the "Done with Deductions" button. After several screens (depending on what entries you've made) you will come to the “Penalty May Apply” screen. Here you can pick the exception.
You can also go to the section under:
Federal Taxes,
Other Tax Situations,
Additional Tax Payments,
Extra Tax on Early Retirement Withdrawals
