How should Turbo Tax handle 1099R has code of 1 when it should be 2. Turbo Tax says it will fill out 5329 form automatically however I am still being 10% taxed. Why?

[Phillip1]

If there is an applicable exception to the early withdrawal penalty, you can claim the exception (an eliminate the penalty) by doing the following:

1. Click on the Federal category on the left hand navigation bar.
2. Click on the Wages and Income tab at the top of the screen.
3. Find the section labeled "Retirement Plans and Social Security" and click show more.
4. Click revisit on the line labeled "IRA, 401(k), Pension Plan Withdrawals (1099-R)"
5. On the screen labeled "Your 1099-R Entries" click continue.
6. Continue to the screen labeled "Identify the Plan" and choose the appropriate option (most likely qualified plan) and hit continue.
7. This should bring up a screen labeled "These Situations May Lower Your Tax Bill" enter the applicable amount to be excepted from the 10% penalty in the appropriate field. This will remove (or reduce) the penalty.