1099-R code 1

[monicac]

I have a client that took a distribution from their 401K following under the Covid exception but the financial institution put code 1 which is early withdrawal with no known exception instead of code 2- early withdrawal with exception.

I filled out the Qualified Disaster distribution worksheet and it took care of it properly however is the IRS going to disallow it because the wrong code was used?

[qbteachmt]

The code is correct for the Issuer. Until the taxpayer does whatever they need to do (rollover, declares they are qualified for disaster, buys a home), there is only the Distribution code.

[monicac]

All of my other clients that took that same Covid early withdrawal, the financial institutions used code 2 -Early withdrawal exception applies. But you are saying it doesn't matter to the IRS which of the 2 codes they use?

[qbteachmt · Accepted solution]

"the financial institutions used code 2 -Early withdrawal exception applies."

Some of the issuers have the taxpayer requesting the withdrawal sign a self-declaration disaster form. Some don't ask for this. It depends on the account and plan type, for allowed withdrawals or requested distributions, etc.

For instance, a financial institution doesn't know you qualified for coronavirus distribution, because HIPAA means they cannot ask you if you are/were sick.

"But you are saying it doesn't matter to the IRS which of the 2 codes they use?"

You still need to identify what is the exception. The code for money Out isn't the tax treatment. For example, an "early" withdrawal that the taxpayer rolls over in the required timeframe means it is no longer "early" withdrawal subject to penalty, for the tax payer. The Issuer of the 1099-R still was told to make a distribution and knows the person isn't of age.

[monicac]

Thanks for explanation! 😊