A code 2 *is* an exemption. There is no penalty with a code 2.
The payer uses a code 2 under these circumstances:
Use Code 2 only if the participant has not reached age 59½ and you know the distribution is the following.
- A Roth IRA conversion (an IRA converted to a Roth IRA).
- A distribution made from a qualified retirement plan or IRA because of an IRS levy under section 6331.
- A governmental section 457(b) plan distribution that is not subject to the
additional 10% tax. But see Governmental section 457(b) plans, earlier, for information on distributions that may be subject to the 10% additional tax.
- A distribution from a qualified retirement plan after separation from service in or after the year the participant has reached age 55.
- A distribution from a governmental defined benefit plan to a public safety employee (as defined in section 72(t)(10)(B)) after separation from service, in or after the year the employee has reached age 50.
- A distribution that is part of a series of substantially equal periodic payments as described in section 72(q), (t), (u), or (v).
- A distribution that is a permissible withdrawal under an eligible automatic contribution arrangement (EACA).
- Any other distribution subject to an exception under section 72(q), (t), (u), or (v) that is not required to be reported using Code 1, 3, or 4.
**Disclaimer: This post is for discussion purposes only and is NOT tax advice. The author takes no responsibility for the accuracy of any information in this post.**
