Do I have to pay early withdraw penalty on a 1099-R where I am the listed beneficiary as the original account holder is deceased?

[ythorneley]

I did not have to pay early withdraw on 2020 tax return as box 7 had a distribution code of 4. This year it has a distribution code of 1. This is an ESOP distribution for a total of 5 years. 1st payment received in 2019 by original account holder. Death occurred in 2020, here I received 2nd payment. Is my early withdraw penalty free (10%) because of death? If so why is the distribution code listed as 1?

[MaryK4]

No, an ESOP is designed so that when a vested participant leaves the company, the value of the ESOP account to that former employee.  Normally a Code 4 is a death benefit which does not incur the penalty, but an ESOP can be set up differently.

The ESOP trust (or company) repurchases the employee’s shares and the employee receives payment, which they can choose to roll over into an individual retirement account (IRA) within a stipulated time limit, or pay income tax (along with an additional 10% excise tax if under age 59-½) and use as they would any other income.  When a death occurs, it is treated as a separation with the beneficiary taking the place of the employee.

[ythorneley]

@MaryK4 So because a death occurred, it was transferred to me, but because I'm under 59 1/2 I have to have the 10% early withdraw penalty? I'm withdrawing because it's what was left for me and 2 siblings that I have to distribute. When inputting this form on turbo tax I'm unsure if I'm doing it correctly as I'm saying there is an exception (due to death) and early withdrawal penalty should not be applied.

[ColeenD3]

A beneficiary is not subject to the early withdrawal penalty.

You won't have to pay the penalty on amounts withdrawn if you inherit from a non-spouse, even if the IRA owner was under age 59 1/2. You must, however, include any IRA withdrawals in your adjusted gross income (AGI).