What Do the 1099-R Codes in Box 7 Mean?

When you receive a Form 1099-R, it means you’ve received a distribution of $10 or more from a pension, annuity, retirement plan, profit-sharing plan, or an IRA. This form is provided by the financial institution that manages your retirement account and details the total amount of the distribution you received during the year.

The data on Form 1099-R is used to report income and determine the taxability of the funds you received. Understanding the details on this document is a necessary step in accurately completing your annual tax return.

Understanding the Box 7 Distribution Codes

The character in Box 7 of your Form 1099-R provides specific details about the nature of your distribution. Financial institutions use these codes to inform the IRS of the circumstances surrounding your withdrawal, which directly influences how it is taxed. Since up to two codes can be entered in Box 7, you might see a combination that further specifies your situation.

Codes related to early distributions are among the most common. Code 1 signifies an early distribution where the plan administrator does not know of an exception to the penalty, used when the recipient is under age 59 ½. In contrast, Code 2 is used for a distribution before age 59 ½, but a known exception applies, such as for certain medical or higher education costs.

Distributions due to specific life events have their own codes. Code 3 is used for distributions taken because of a disability. Code 4 indicates a distribution to a beneficiary, including an estate or trust, after the account owner’s death. This code is used regardless of the age of the deceased or the beneficiary.

Certain codes address rollovers and other transactions. Code G signifies a direct rollover to another qualified plan, such as from a 401(k) to an IRA, which is a non-taxable event. Code H is similar but denotes a direct rollover from a designated Roth account to a Roth IRA. A Code 6 indicates a tax-free exchange of an insurance or annuity contract.

Some codes are specific to the type of retirement account. Code J is for an early distribution from a Roth IRA when the owner is under 59 ½ and other conditions are not met. Code S applies to an early distribution from a SIMPLE IRA within the first two years of participation, which may be subject to a higher penalty. Code B indicates the distribution is from a designated Roth account, like a Roth 401(k).

Other codes cover a range of scenarios. Code 7 is for a normal distribution, used when the recipient is age 59 ½ or older and no other code applies. Code 5 is used for a prohibited transaction, which can have significant consequences, often resulting in the account losing its tax-advantaged status. Code L indicates a loan from a retirement plan is being treated as a taxable distribution.

Tax Consequences of Common Codes

The code in Box 7 impacts your tax liability. For many distributions, the taxable portion shown in Box 2a is included with your other income and taxed at your regular rate. The code provides the context for whether additional taxes or penalties apply.

A distribution marked with Code 1 often carries a significant financial consequence. In addition to regular income tax, you will likely face a 10% additional tax on the early distribution.

For a Code 7, the 10% additional tax does not apply because you have reached retirement age, though the distribution is still subject to ordinary income tax. A Code G for a direct rollover results in no immediate tax consequence, as taxation is deferred until you take distributions from the new account.

A Code 4 means the beneficiary reports the income, but the 10% early withdrawal penalty does not apply, regardless of the beneficiary’s age. For a Code 2, you will need to file a specific form with your tax return to claim an exception and avoid the 10% penalty.

Required Information for Tax Filing

If your Form 1099-R shows a code for an early distribution, you may need to file IRS Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.” This form is used to either calculate and pay the 10% early withdrawal penalty or to inform the IRS that you meet one of the exceptions.

To complete Form 5329, you will need your Form 1099-R to identify the total distribution amount. You must also identify the specific exception you are claiming, such as for a disability, qualified higher education expenses, or a first-time home purchase.

The instructions for Form 5329 provide a list of exception codes that you must enter on the form to correspond with your situation. You should maintain documentation that supports your claim for an exception. For example, if claiming an exception for higher education expenses, keep records of tuition payments and related costs in case the IRS has questions.

How to Report Your 1099-R Distribution

After reviewing your Form 1099-R and completing Form 5329 if necessary, you will report the information on your Form 1040. You will report the gross distribution from Box 1 of Form 1099-R on either line 4a or 5a of your Form 1040. The taxable amount from Box 2a is entered on line 4b or 5b.

The specific lines you use depend on whether the distribution is from an IRA (lines 4a/4b) or from a pension or annuity plan (lines 5a/5b). If you filed Form 5329, the amount of the additional tax is carried over to Schedule 2 of your Form 1040. You must attach the completed Form 5329 to your tax return when you file.