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1099 R, code 2

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Level 1

I have a client that that has distribution code marked "2"on his 1099-R. He is 58 and retired from a company. He believes that because code 2 (where it says "exemption applies") is marked and not a 1 he should NOT pay the penalty.  He used the money to buy investment property.  I have read all the exemptions but I don't see why he would be exempt from the penalty.  Thanks for any help you can give me.  

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Level 15
Level 15

Code 2 means no penalty, hes correct...its still taxable, doesn't matter what he did with the money, but no penalty will apply.  Look into Separation from service at age 55, that may be why its already marked Code 2.


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪

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Level 15
Level 15

Code 2 means no penalty, hes correct...its still taxable, doesn't matter what he did with the money, but no penalty will apply.  Look into Separation from service at age 55, that may be why its already marked Code 2.


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪

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Level 1

Thank you very much.  This helps a lot.  

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Level 11

IRS instructions for preparing 1099-R state that Code 2 is used for:

"• A distribution from a qualified retirement plan after separation from service in
or after the year the participant has reached age 55."

For retired public-safety employees, the age limit is 50, although I have had to battle Nationwide to get them to do it correctly.  

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Level 7

If the 1099-R worksheet was filled out correctly, the program should not even calculate a penalty with a code 2 in box 7. Are you trying to force a penalty?