1099R Code 2

[ILLMAS]

Story first:  Back in October/November 2015 TP called to let me know he was withdrawing his retirement because he was losing money, I said fine, just make sure to take out 10% for the penalty and another 15% federal taxes.  Fast forward to this past Saturday, TP brings in his 1099R with code 2, right away, I confirm his age (56) and if he knew why they might put a code 2.  His response was he didn't know exactly, he thought he was withdrawing it with the penalty and the only think he could think was when he decided to withdraw the money, at that point his employer was switching plan administrators and maybe there was a mix up.   Anyway, I pulled out from IRS regulations on code 2 and non of them applied to him, so I went ahead used code 1, I have been thinking about all weekend and wanted to see if I did the right thing?

MAS

[Possi]

I don't know much, but I know I wouldn't have done that.

My pension started when my ex turned 55 1/2 (QDRO) and I was only 54. Mine was code 2 and it was correct.

[Lion EA]

I enter forms as is, even if wrong, usually.  I make adjustments on other entry screens, check boxes, whatever, to make the return reflect what it should -- in this case F5329 entry if he should pay the additional 10%.  But, as Possi says, you need to ask your client questions to see what might fit.  Did he leave employment, for instance?

[ILLMAS]

Here is the questions I went through with my client:

Use Code 2 only if the employee/taxpayer has not reached age 59 1/2 and you know the distribution is:

• A Roth IRA conversion (an IRA converted to a Roth IRA).
• A distribution made from a qualified retirement plan or IRA because of an IRS levy under section 6331.
• A section 457(b) plan distribution that is not subject to the additional 10% tax. See Section 457(b) plan distributions on page 12 of the IRS instructions for Form 1099-R for information on distributions that may be subject to the 10% additional tax.
• A distribution from a qualified retirement plan after separation from service in or after the year the taxpayer has reached age 55.
• A distribution from a governmental defined benefit plan to a public safety employee after separation from service in or after the year the employee has reached age 50.
• A distribution that is part of a series of substantially equal periodic payments as described in section 72(q), (t), (u), or (v).
• A distribution that is a permissible withdrawal under an eligible automatic contribution arrangement (EACA).
• Any other distribution subject to an exception under section 72(q), (t), (u), or (v) that is not required to be reported using Code 1, 3, or 4.

All the answer were NO, and after I explain to him the code appeared to be incorrect, he had was okay paying the penalty since I had informed him since the last time we talked.

MAS