Form 1099-R Box 7 Code

[BrianW]

Background: My wife took an early distribution from her 403(B)(7) retirement account that according to IRS Section 72(t)(2)(A)(v), 72(t)(10) is provides an exception for the 10% penalty for early withdrawal: "Separation from Service - the employee separates from service during or after the year the employee reaches age 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan)". She was 56 years of age at time of separation and made the withdrawal at 58 years of age. Question: Box 7 of the 1099-R form has a '1-Early Distribution, no known exception'. Should it be '2-Early Distribution, exception applies' since there should be no penalty applied? Thank you for any guidance!

[LindaA]

While code 2 would have made things easier, you can indicate that your wife separated from service the year during or after age 55 during the 1099-R interview. You'll do this on the screen that says "These situations may lower your tax bill", which comes up late in the TurboTax interview. This way the additional 10% tax won't apply to her distribution. 

As mentioned, TurboTax states "Let's see if we can reduce your early withdrawal penalty" and "These situations may lower your tax bill" towards the end of the 1099-R interview, after you reach the screen that lists Your 1099-R Entries. Just keep answering the interview questions and you'll get there eventually. And make sure you check "qualified retirement plan" when asked to identify the plan since your wife's 403(b) plan is a qualified plan. Otherwise, you won't see "separation from service the year during or after age 55" listed.

[BrianW]

Thank you for the guidance Linda! I had not made it that far into the process. I had stopped because we were very concerned that the code had been wrong because when we originally were needing to withdraw the money, the representatives were not aware of the exception and insisted the penalty had to be assessed on the withdrawal. We were afraid this error had been carried over and we would need to contact them to have it corrected.