My 1099-R box 7 has the values 2 & B in it

[sgrenald]

My previous employer had both a Roth401k and a regular 401k. And the money is in Vanguard (i.e., I can't upload the 1099-R and have to key everything in). I'm under 59.5 and last year I pulled out $10,000. Vanguard won't let you pull from just the Roth side - it pulls proportional amounts from each account, so I got $7600 from the Roth and $2400 from the traditional. Vanguard also withheld about $470 in taxes. 

Like the subject says, the 1099-R has values of 2 & B in Box 7. Box 5 has $7600 in it. Turbotax is giving me an error because I shouldn't have a value of "B" in box 7b for an IRA. I couldn't find much info on this in the Community. One thing I found was when it asks if this is a Roth IRA to say "No." So technically that's true because it's a Roth401k. But then my taxes due go up by about $900, meaning I'm paying about $1400 on $2400 of taxable income. Which doesn't sound right.

I contacted the Turbotax help line, and they suggested I break up the 1099-R info into two separate entries. Any ideas out there?

[RobertB4444]

Splitting it into 2 is a good idea.  The lazy people who issued it to you should have issued you two separate 1099-Rs anyway.  2 and B are not compatible codes.  2 refers to an early taxable distribution for which an exception applies so there are no penalties charged.  B refers to a distribution from a Roth 401(k).  One of those is taxable and one is not.  

You should get a set of corrected forms but it sounds like they're not going to do it.  If they won't then splitting up your 1099-R is really the only way to enter it.  The $7600 is code B and the $2400 is code 2.

[sgrenald]

Just to add to the "fun" (and I'm sorry I didn't post this three weeks ago when you replied). I tried to split it. I created ONLY the $2400 "2" entry and it STILL wanted to bump up my tax liability by $900. I'll futz with it again. I'm tempted to pay the estimates and file an extension

[RogerD1]

I just tried entering a 1099-R using the information that you gave in your 1st post and the amount of tax that was assessed on $2400 was exactly 22% - $528 - this fake client is in the 22% bracket, so this result was as it is expected to be.  I also didn't get an error when entering the codes B & 2 in for box 7.  Following are the entries that I used:

• Box 1 - $10,000
• Box 2a - $2,400
• Box 4 - $470
• Box 5 - $7,600
• Box 7 - code B and 2
• Is the IRA/SEP/SIMPLE box on this 1099-R checked? - No, the box is blank
• Did this money come from a Roth IRA? - No
• What type of retirement plan do you have with Vanguard? - Qualified plan
• Do any of these situations apply to you? - None of these apply
• Tell us if you moved the money through a rollover or conversion - I didn't roll over or convert this money
• Annuity information - No
• Have you ever taken a disaster distribution before 2025? - No

The amount of tax that you were assessed would equate to 37%.  This is the highest tax bracket, which is for taxable incomes over $626,350 for single/head of household or $751,600 for married filing jointly.  Unless your taxable income is at or above those limits, you should not be getting assessed a 37% tax on the taxable amount of your distribution.

[sgrenald]

I got on the phone with a Turbotax expert who straightened me out. The issue was that there's a bunch of questions at the end (you have them listed below) and as you progress through it, you get to the point for "Let's see if we can lower your tax bill" and for the box "Separation from service in or after year reaching age 55" I entered the $7600 amount, and then all was right with the world. 

On that same screen I also saw the entry for health insurance premiums for unemployed individuals, which was me for most of last year. So I ended up bringing my tax burden down even more!

Thanks for the help!

[dmertz]

The increase in balance due of $900 is almost certainly correct.  Given that this distribution was not rolled over, there is virtually no way that the entry of this Form 1099-R into TurboTax could produce in incorrect increase in tax liability.

No part of this distribution came from the traditional account in the 401(k).

As you found, you must answer No to the unnecessary and confusing question that asks if this is a distribution from a Roth IRA; the code B says that it is not.

The difference between the amount in box 1 and the amount in box 5, $2,400, is taxable income and should be present in box 2a because it represents the taxable earnings that were included in the distribution.  Unlike distributions from a Roth IRA which follow ordering rules, nonqualified distributions from a Roth 401(k) are a proportionate mix of contribution basis and taxable earnings.

There is no reason to split the Form 1099-R.

The code 2 indicates that the taxable amount of this distribution is not subject to an early-distribution penalty, so TurboTax is not adding any early-distribution penalty on Form 5329 for this distribution.  No need to claim a penalty exception for an penalty that isn't there.

"But then my taxes due go up by about $900, meaning I'm paying about $1400 on $2400 of taxable income. Which doesn't sound right."

I assume that $480 was withheld for taxes such that your tax liability increased by $1,380 when you entered this distribution.

The large increase in your tax liability suggests that the $2,400 increase in your AGI has side effects that increase the tax liability beyond the amount indicated by your tax bracket.  You would need to compare the tax return with and without this Form 1099-R entered to determine the side effects.  A very plausible explanation could be the this distribution substantially reduced a Retirement Savings Contributions Credit that you would otherwise have been eligible to receive.  That alone could change your tax liability by as much as $1,000 even if the distribution had been entirely nontaxable.

[sgrenald]

It was a qualified distribution. I was over 55 when I left my employer. And my contributions to the account (per Vanguard) were greater than what I withdrew. Vanguard told me that they couldn't just pull money from the Roth part of the 401k, they had to pull it proportionally from both sides. Since 76% of the account was Roth and 24% was traditional, that's how it came out.

Retirement Savings Contributions Credit doesn't apply to me. My income was over $38,000. But, as I said above, I got it resolved. Taxes are filed the state and Federal  EFTs were transmitted. Just waiting for the hit on my bank account...

[dmertz]

You must be age 59½ or over for the distribution from the designated Roth account to be a qualified distribution.  Being age 55 only eliminates the early-distribution penalty on taxable earnings from the designated Roth account.

What Vanguard likely told you is that you cannot just pull out the nontaxable portion of the funds in the designated Roth account, not that any portion had to come from the traditional account.  Because your distribution was not a qualified distribution, the distribution was a mix of contribution basis and taxable gains that had occurred in the designated Roth account.  No part of the distribution reported on the code-2B Form 1099-R came from the traditional account.  Had any amount been distributed from the traditional account, it would have been reported on a separate code-2 Form 1099-R.  (Vanguard might be a financial institution that lists multiple Forms 1099-R on a single page, so make sure that what Vanguard provided is not multiple Forms 1099-R.)

If the amount in box 2a of the Form 1099-R is not being included on Form 1040 line 5b, you will likely get a notice from the IRS indicating that you underreported income.

I'm puzzled why indicating $7,600 as being eligible for the age-55 exception would have any effect since nothing on a code-2 Form 1099-R is subject to that penalty in the first place.  The age-55 exception only makes sense in regard to distributions reported on Form 1099-R that includes code 1 in box 7.  Also, there is never an early-distribution penalty on the nontaxable portion of any distribution, so indicating that $7,600 was eligible for this exception makes even less sense.

Have you entered some other Form 1099-R that has code 1 in box 7 and your Form 5329 is inappropriately applying the age-55 exception to that distribution?  That's the only way I can imagine that claiming the age-55 exception could have any effect.