What Your 1099-R Box 7 Code Means for Your Tax Return

Form 1099-R reports distributions from retirement accounts like pensions, IRAs, and 401(k)s. Box 7 of this form contains a single-character code that explains to the IRS the reason for your distribution. This code dictates whether the funds are taxable as ordinary income, subject to an additional penalty, or eligible for tax-free treatment. The plan administrator selects the code based on the information they have about your withdrawal, and accurately interpreting it helps you correctly prepare your tax return.

Decoding Box 7 Distribution Codes

The codes in Box 7 are separated into numeric and alphabetic characters. Each character has a distinct meaning that directs the tax treatment of your distribution.

Common Numeric Codes

The most frequently used codes are numbers, which cover a range of standard distribution events.

• Code 1: Early distribution, no known exception. This means you are under age 59½ and the payer is not aware of any circumstance that would let you avoid a penalty.
• Code 2: Early distribution, exception applies. This also relates to a withdrawal before age 59½, but the plan administrator believes you meet an exception to the early withdrawal penalty.
• Code 3: Disability. This is used for distributions due to total and permanent disability, regardless of your age.
• Code 4: Death. The distribution is made to a beneficiary after the account holder’s death.
• Code 5: Prohibited transaction. This is an improper use of your IRA that can cause the account to lose its tax-favored status.
• Code 6: Section 1035 exchange. This is a tax-free exchange of an insurance contract.
• Code 7: Normal distribution. This is used when you are at least 59½ years old and taking a regular withdrawal.
• Code 8: Excess contributions plus earnings/excess deferrals. These are taxed in the year of the distribution.
• Code 9: Cost of current life insurance protection. This reports the cost of insurance paid from the plan.

Rollover Codes

Code G signifies a “Direct rollover” to another qualified plan, where funds are transferred directly between financial institutions without you taking possession of them. Code H indicates a “Direct rollover of a designated Roth account distribution to a Roth IRA,” such as from a Roth 401(k). Because the money remains within a tax-deferred (Code G) or tax-advantaged (Code H) retirement setting, these direct transfers are not taxable events.

Roth IRA Codes

Distributions from Roth IRAs have their own codes. Code J indicates an “Early distribution from a Roth IRA” with no known exception, where the earnings portion is taxable and subject to a penalty. Code Q signifies a “Qualified distribution from a Roth IRA.” A distribution is qualified, and therefore completely tax-free, if you have held a Roth IRA for at least five years and you are over age 59½, disabled, or meet another specific condition. Code T is for a “Roth IRA distribution, exception applies,” meaning you are under 59½ but qualify for an exception to the penalty on the earnings.

Other Significant Codes

Code L is used when a “Loan treated as a distribution” occurs, which happens if you default on a loan from your qualified plan. Code B indicates a distribution is from a “Designated Roth account,” such as a Roth 401(k), and is often used with another code. Code S applies to distributions from a SIMPLE IRA within the first two years of participation, where withdrawals are subject to a higher 25% penalty instead of the standard 10%.

Tax Consequences of Box 7 Codes

For most distributions from traditional, pre-tax retirement accounts, the amount is taxable income. With a Code 7 (Normal distribution) or Code 4 (Death), the amount in Box 2a, “Taxable amount,” is added to your other income and taxed at your regular income tax rate. This is also true for a Code 1 distribution, which carries an additional penalty.

The 10% additional tax on early distributions is a common penalty. This tax applies to withdrawals indicated by Code 1 or Code J. It is important to recognize this is not a withholding; it is an additional tax calculated on your return on top of your ordinary income tax liability. For example, a $10,000 early distribution would result in a $1,000 additional tax, plus the income tax on the $10,000.

Codes 2, 3, or T signal that you may be exempt from the 10% penalty because the plan administrator believes an exception applies. Common exceptions include distributions for disability, qualified higher education expenses, or a first-time home purchase (up to $10,000). Even if your form shows Code 1, you can still claim an exception on your tax return if you qualify.

Conversely, some codes indicate the distribution is not taxable. A rollover, marked with Code G or H, is not reported as taxable income because the funds were moved to another retirement account. Likewise, a Code Q signifies a qualified Roth IRA distribution, which is entirely tax-free. This is because Roth IRA contributions are made with after-tax money and qualified earnings are not taxed.

How to Report Form 1099-R on Your Tax Return

To report a taxable distribution, you will use Form 1040. Distributions from pensions, annuities, and 401(k)s are reported on lines 5a (gross distribution) and 5b (taxable amount). IRA distributions use lines 4a (gross distribution) and 4b (taxable amount). Any federal income tax withheld, shown in Box 4, is reported with your other withholdings on your tax return.

When reporting a rollover, enter the gross distribution from Box 1 on line 4a (for an IRA) or 5a (for other plans). You will then enter “$0” as the taxable amount on line 4b or 5b. Write “ROLLOVER” in the space next to the line to show the IRS the funds were moved to another retirement account and are not taxable.

If your distribution is subject to the 10% additional tax, you may need to file Form 5329, “Additional Taxes on Qualified Plans.” If your 1099-R shows code 1 in Box 7 and you owe the penalty on the entire taxable amount, you can report the tax directly on Schedule 2 (Form 1040) without Form 5329.

You must file Form 5329 if you qualify for an exception that is not indicated by the code on your 1099-R. For example, if your form shows Code 1 but you used the funds for a qualified first-time home purchase, you would file Form 5329 to claim the exception. The tax is then carried to Schedule 2 and added to your total tax liability.