topic Re: Distribution Code 2 is incorrectly causing 10% penalty to be applied when the software says i... in Retirement tax questions

Distribution Code 2 is incorrectly causing 10% penalty to be applied when the software says it isnt. Anyone else having this issue?

adam.starrett — Tue, 02 Feb 2021 03:13:09 GMT

I can see my refund go down exactly 10% of my disbursement. Additionally, Code 1 while it should be more punitive, does not charge the 10% penalty. I feel like this is an issue with Turbotax software.

Re: Distribution Code 2 is incorrectly causing 10% penalty to be applied when the software says it isnt. Anyone else having this issue?

dmertz — Tue, 02 Feb 2021 03:32:31 GMT

Rather than this being a 10% early-distribution penalty, perhaps the distribution is not subject any income tax and therefore not subject to any early-distribution penalty, but is instead causing a reduction in a Retirement Savings Contributions Credit equal to 10% of the amount distributed. If this is the case, this distribution will not be included on Form 1040 line 4b or 5b, Schedule 2 line 6 will not show any penalty with regard to this distribution and you'll see that a credit that is present on Schedule 3 line 4 when the 1099-R is deleted is reduced by 10% of the gross amount distributed when the 1099-R form is present. This is the only scenario I can think of where changing from code 2 to code 1 would not change your tax liability.

Re: Distribution Code 2 is incorrectly causing 10% penalty to be applied when the software says it isnt. Anyone else having this issue?

Anonymous — Mon, 28 Feb 2022 21:25:46 GMT

This is happening to me too. I enter the 1099R with code 2 in box 7. I get a message that says I will not have to pay a penalty. Then it sends me to questions about what I did with the distribution. I was initially told I would owe a 25% penalty but after research I entered the entire distribution in the box for equal distribution payments (or something similar). That brought it down to 10%. Something is not working properly. Please answer this Turbotax. Or anyone with a solution please.

Re: Distribution Code 2 is incorrectly causing 10% penalty to be applied when the software says i...

KrisD15 — Mon, 28 Feb 2022 21:55:11 GMT

To clarify

what did you do with the Distribution?

Code 2 is Early Distribution with exception,

what is your exception?

There are exceptions to "Penalty Tax" (see Schedule 2 line 8 and 1040 line 23)

but you may still incur income tax on the distribution unless you rolled it over to another account (see 1040 line 4b)

Please do not enter the distribution as an annuity (equal payments) if this was not the case.

Re: Distribution Code 2 is incorrectly causing 10% penalty to be applied when the software says i...

Anonymous — Tue, 01 Mar 2022 01:18:16 GMT

This was a 72T set up soon after retirement (before age 59.5) that provided monthly income, locked in for 5 years and is not supposed to incur a penalty for early withdrawal. I did have federal taxes taken out and know that this income is taxable. But my concern is the penalty. With this information, do you feel that the equal payment entry was correct? I spent all afternoon trying to work this out. I received help from both a turbotax tech rep and they in turn reached out to a turbotax tax expert. They gave me a solution that seems to have fixed the problem (no more penalty). But it was counter intuitive and left me feeling a little wary. Thank you for replying and I welcome your input. It is appreciated.

Re: Distribution Code 2 is incorrectly causing 10% penalty to be applied when the software says i...

KrisD15 — Tue, 01 Mar 2022 01:56:30 GMT

YES

That is how you would report the distributions.

According to the IRS:

"The substantially equal period payments must generally continue for at least five full years, or if later, until age 59 ½. For example, if you began taking payments at age 56 on December 1, 2006, you may not take a different distribution or alter the amount of the payment until December 1, 2011, even though your fifth payment was taken on December 1, 2010.

If you begin taking substantially equal periodic payments on December 1, 2005, and you turn 59 ½ on July 1, 2011, you may not take a different distribution or alter the amount of the payment until July 1, 2011."

See Number 11