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.