topic What code should be used in for early withdrawal of a 401k due to disability? in Retirement tax questions

What code should be used in for early withdrawal of a 401k due to disability?

TheMomb10 — Wed, 29 Jan 2025 17:15:21 GMT

My husband was diagnosed with Early-onset Alzheimer's disease almost 3 years ago. We withdrew his small 401k early knowing he would be exempt due to his disability. On the 1099-R from the company handling the plan, in box 7 there is a code 2 listed. Should it be a code 3? I called the company and they said they never use code 3. When I use code 3, my refund is significantly larger.

Before I file with the code 2, I want to make sure it is correct.

Re: What code should be used in for early withdrawal of a 401k due to disability?

DoninGA — Wed, 29 Jan 2025 17:29:32 GMT

The code 2 in box 7 would be correct if he was under the age of 59 1/2 when the distribution was made.

Code 2 —Early distribution, exception applies (under age 59½)

This means that the distribution is Not subject to the 10% early distribution penalty.

There are no exemptions from federal income tax for distributions from a 401(k). The distribution is entered as ordinary income on the federal tax return.

Re: What code should be used in for early withdrawal of a 401k due to disability?

Opus 17 — Wed, 29 Jan 2025 18:40:25 GMT

Code 3 would require that the 401k plan certify that your spouse is disabled. They aren't doctors and aren't going to do this. Code 2 is correct for a distribution before age 59-1/2.

The distribution is always subject to income tax, but disability is an exception to the 10% penalty for early withdrawal. (Code 3, if used, would exclude the 10% penalty but you would still pay regular income tax.). You should be able to self-certify the disability. After entering the 1099-R, turbotax should give you a list of exceptions to the penalty and ask if he qualifies for any of them.