My 1099-R Box 7 code changed from 2 to 7 when I turned 59+1/2 and TT wants to assess early withdrawal penalty

[wood2]

I retired from teaching and receive a pension from the state system. In prior years, my 1099-R Box 7 code was "2", indicating Distribution with tax exception, because we are not required to pay early distribution penalties if we get these pension payments prior to age 59+1/2. However, I turned 59+1/2 eight months into Tax Year 2024, and the Box 7 code changed to "7" for Tax Year 2024, indicating a Normal Distribution. Turbotax now wants to charge me an early withdrawal penalty for the first eight months of the year before I turned 59+1/2. I asked for an amended 1099-R with code "2" but the state insists they are correct in changing it to "7" now that I'm 59+1/2. How do I fix this in TT so I don't pay early withdrawal tax?

[dmertz]

The custodian has coded the Form 1099-R correctly with code 7 for distributions made after age 59½.

Code 2 and code 7 both mean that the distribution is not subject to an early-distribution penalty and TurboTax treats both as not being subject to any early-distribution penalty.  If you are seeing a penalty, it's for some other reason or you've entered something incorrectly.

[jcalls1995]

I can't make TurboTax do that (assess the penalty). Make sure you're birthdate is correct, then delete the 1099-R you input and put it in again, making sure the correct inputs are used. Once input there are questions you may not be asked again based on your profile and other answers in the interview. That's why you should delete the form and enter it again.

If you're using the download version (TT Desktop), make sure you run updates before using the software, even if you just downloaded it.

[VolvoGirl]

Where are you seeing a penalty?  Could it be the penalty on 1040 line 38?  Did you cash out any CDs early?  A  Early Withdrawal Penalty on a CD is a deduction from income and a good thing.  Or did you just see the tax increase?  The withholding might not have been enough to cover the tax on your income.  

[jcalls1995]

... your birthdate is correct ...

[wood2]

Thanks everyone. On my first attempt, TT was asking questions on review about the early withdrawals before 59+1/2 and telling me there would be a penalty applied. Following the advice here, I deleted the 1099-R completely and started over. I made sure to enter the 1099-R info exactly as it was:  Code 7 in Box 7, and did not select the IRA/SEP box. On review, it asked me several interview questions, and I gave the same answers as before, but I did NOT get the warnings about early withdrawal penalties this time. Can't explain it, other than the fact that deleting the 1099-R and starting over seemed to help. The 1099-R was already there from prior years when I started, so maybe there was some kind of legacy code that screwed things up. Deleting and starting over seemed to be the fix.

[jcalls1995]

Good to hear that fixed it. I've worked at TurboTax for 5 yrs. Deleting and reinputting are the first things I try when troubleshooting odd results.