The 10% early withdraw rule doesn't apply to military retirement. TurboTax asks "Did you receive any of this money before you turned 59 1/2? A "yes" cuts my refund. Why?

[SteamTrain]

Not sure

....I've worked thru the form Q&A 6 ways from Sunday for a 55 year old, and I can't get the penalty to show up unless I have a Code 1 in box 7   (which it wouldn't be for a normal Military retirement, even if under 59.5....might also happen in certain situations if you accidentally checked "IRA/SEP/Simple" box in the main form. )

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You really have that 2020 military 1099-R form already ?   Don't wing it, wait for the form and enter it carefully. 

AND....If you get a question in the follow-up pages about whether it is a Qualified, or Non-qualified retirement plan.....Military 1099-R forms are for Non-qualified plans.

[turbogreg1]

Thanks. Yes, military retirees already have their 1099-Rs. I have a straight-forward 1099-R from Defense Finance and Accounting Service, code 7 in Box 7, IRA/SEP/SIMPLE box on this 1099-R is blank, picking non-qualified on that screen, nothing else special about the 1099-R or me. Had 2 months fall under the 59 1/2 status. When I answer "yes" to the question "Did you receive any of this money before you turned 59 1/2?". I see my status change from getting all $2K of paid tax back (This is the only income I've entered this early), to owing $700+. If I lie and say "no" to the  "Did you receive any of this money before you turned 59 1/2?", I get all my tax back. TurboTax may have their coding wrong. 

[Critter-3]

If this is a code 7 distribution then I think you went down a wrong path somewhere since you should not be seeing any of those questions ...  I recommend you delete the 1099-R then close out of the program and reboot the computer.   Then log back in and re enter the 1099-R again and pay close attention to the follow up questions.  The retirement should be taxable but no penalty applied so you don't need to answer any penalty forgiveness questions at all .  

[SteamTrain]

@turbogreg1 

Yep...see it now for my DFAS 1099-R for someone who turned 59.5 in 2020.  The problem doesn't exist for a non-qualified 1099-R, code 7 for a 56 year old, and no penalty......just for the year they turn 59.5 .

I don't have a real DFAS 1099-R, and was unsure as to whether Military 1099-R forms, (before age 59.5 ) are coded with a "7" or not.   Did you get a DFAS 1099-R last year with a code 7? or a code 2?

@dmertz    Do you get the same ?  I'm looking at Online software for now...haven't checked my desktop software yet to see what it does.

[SteamTrain]

....for a person who turned 59.5 in 2020.....the "desktop" software still asks the question about whether you received any $ before age 59.5  ....but as long as you indicate it was from a non-qualified plan on the next page, then no penalty is applied.

Thus..it seems to be an "Online" software issue for now.

[dmertz]

TurboTax only asks the question if you are entering a code 7 Form 1099-R and you were not already age 59½ or over at the beginning of the year.  [In most cases, but apparently not for military pensions; see follow-up replies below regarding military pensions instead of what follows in this reply] if not subject to an early-distribution penalty, distributions received before age 59½ should have code 2 on the Form 1099-R, not code 7.  Only the distributions received after age 59½ should have code 7.  TurboTax automatically treats code 2 as not subject to penalty.  When entering the code 7 Form 1099-R, the question asking if any was receive before age 59½ should always be able to be answered No if the forms were prepared properly by the payer.

Online and the CD/download versions of TurboTax appear to be handling these differently.  Online behaves as you described while the CD/download versions appear to never treat code 7 as subject to penalty [unless TurboTax's box A1 on its 1099-R form is marked in Forms mode].

It seems a bit unusual that you would already have a 2020 Form 1099-R since they usually aren't available until later in January.  Do you actually have the form in hand or downloaded?

[SteamTrain]

Since Military commonly are allowed to start retirement quite a bit before age 59.5 and are non-qualified plans....I wasn't sure whether pre-59.5 non-qualified plans were allowed to have a code 7 or not at an earlier age....or should still show a 2 prior to that cutoff age.

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I saw the DFAS schedule on their website, dn they claimed they had their Online 1099-R forms for 2020 in the last half of Dec 2020, but paper forms wouldn't go out until later in January.

[dmertz]

I think you are right.  A part of the instructions for Form 1099-R that I missed says to use code 7 for reporting military pensions or survivor benefit annuities.  So it seems that code 2 is never to be used for these.  (I had thought that these fell under the last bullet item of listed for code 2, but apparently not).

[dmertz]

Earlier I was marking the wrong box in forms mode on TurboTax's 1099-R form used to indicate the a code 7 Form 1099-R is actually subject to an early-distribution penalty.  The age-59½ question apparently marks the A1 box on TurboTax's 1099-R form based on the answer to the question as to whether any of the distribution was received before age 59½, so it seems that the workaround is to answer No even if some was received prior to age 59½ since the question is really just asking if any of the distribution is subject to penalty.  (Unfortunately, for other types of distributions where this question is appropriate, answering Yes causes TurboTax to treat the entire distribution as subject to penalty instead of asking how much is subject to penalty, forcing the user to split the Form 1099-R into two.)

[SteamTrain]

Well,

.....in my desktop software, for this situation, and not using Forms Mode, in the interview, if I say yes to the 59.5 question, and indicate it is a non-qualified plan on the page that follows...then no penalty is assessed.  So that seems right then (and I haven't touched it in Forms Mode, so I didn't accidentally set something the software wouldn't have set).

But in the Online software, answering yes to the 59.5 question, that applies the penalty, and selecting non-qualified plan in the page that follows doesn't correct it.  So it's the Online software that seems to be "off".

IF I have that Right.

[dmertz]

Right.  The online version apparently marks the A1 box on TurboTax's 1099-R form if the question is answered "Yes, I took money out before age 59½" and the CD/download version doesn't mark this box no matter how you answer the question.

[SteamTrain]

I sent an email to Socialwecare to review this post....but have no idea if anyone there is paying attention .

[Critter-3]

I believe this has to do with the program not  being fully functional yet especially in sections like the 1099-R where there were last minute changes ... what you describe is the form 5329 not working correctly and that form is not expected to be functional until at least 1/14  and since the IRS will not process returns until the end of January at best you have time to wait for the updates. 

Click on the REVIEW tab to see what it is and when it is estimated to be ready (when operational) ... 

IRS Forms Availability Table for TurboTax Individual (Personal) Tax Products

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State Forms Availability Table for TurboTax Individual (Personal) Tax Products

[turbogreg1]

Thank you ALL for your help. I was surprised when I woke up (I live in Hawaii) to see how much effort you guys had put into this. To help troubleshoot, here are more details:

1) I am using the online version of TurboTax.

2) I've been receiving retirement pay for 12 years, all my 1099Rs have a 7 (and only a 7) in box 7.

3) I turned 60 in Aug 2020. 

4) My 1099R basic info was carried over from last year's online TurboTax return, so I took the suggestion of deleting the 1099, rebooting and reentering. I still get a the penalty if I answer truthfully to the 59.5 question.   

From your comments, it seems TT has a issue with the online version. I won't have all my PW until Feb, so maybe it will be fixed by them. Do any of you have an "in" with TT to get this corrected? I saw one mention that it had been reported, but with some portion of the military retiree population turning 60 this tax year, this should be impacting at least a few hundred (many more?) retirees.  I want to see it fixed for me and them.

Thanks again to all! TurboGreg in Hawaii (USAF Retired!)