Understanding Form 1099-R distribution codes in Lacerte

Use code 1 only if the employee/taxpayer hasn't reached age 59 and 1/2, and you don't know if any of the exceptions under distribution code 2, 3, or 4 apply.

• Use code 1 even if the distribution is made for medical expenses, health insurance premiums, qualified higher education expenses, a first-time home purchase, or a qualified reservist distribution under section 72(t)(2)(B), (D), (E), (F), or (G).
• Code 1 must also be used even if a taxpayer is 59 and 1/2 or older and he or she modifies a series of substantially equal periodic payments under section 72(q), (t), or (v) before the end of the 5-year period which began with the first payment.

*Used with code (if applicable): 8, B, D, L, or P.

A distribution code 2 isn't entered unless the 1099-R indicates a code 1 and a code 2. Even if the taxpayer has two 1099-R from the same payer, they are each entered separately with a distribution code 1 for each 1099-R.

Use code 2 only if the employee/taxpayer hasn't reached age 59 & 1/2 and you know the distribution is:

• A Roth IRA conversion (an IRA converted to a Roth IRA).
• A distribution made from a qualified retirement plan or IRA because of an IRS levy under section 6331.
• A section 457(b) plan distribution that is not subject to the additional 10% tax. But see Section 457(b) plan distributions on page 12 for information on distributions that may be subject to the 10% additional tax.
• A distribution from a qualified retirement plan after separation from service in or after the year the taxpayer has reached age 55.
• A distribution from a governmental defined benefit plan to a public safety employee after separation from service in or after the year the employee has reached age 50.
• A distribution that is part of a series of substantially equal periodic payments as described in section 72(q), (t), (u), or (v).
• A distribution that is a permissible withdrawal under an eligible automatic contribution arrangement (EACA).
• Any other distribution subject to an exception under section 72(q), (t), (u), or (v) that is not required to be reported using code 1, 3, or 4.

*Used with code (if applicable): 8, B, D, or P.

Refer to section 72(m)(7).

*Used with code (if applicable): D

Use code 4 regardless of the age of the employee/taxpayer to indicate payment to a decedent's beneficiary, including an estate or trust. Also use it for death benefit payments made by an employer but not made as part of a pension, profit-sharing, or retirement plan.

*Used with code (if applicable): 8, A, B, D, G, H, L, or P

Use code 5 if there was a prohibited transaction involving the account. Code 5 means the account is no longer an IRA.

*Used with code (if applicable): None

Use code 6 to indicate the tax-free exchange of life insurance, annuity, long-term care insurance, or endowment contracts under section 1035.

*Used with code (if applicable): W

Use code 7: (a) for a normal distribution from a plan, including a traditional IRA, section 401(k), or section 403(b) plan, if the employee/taxpayer is at least age 59 and 1/2, (b) for a Roth IRA conversion if the participant is at least age 59 and 1/2, and (c) to report a distribution from a life insurance, annuity, or endowment contract and for reporting income from a failed life insurance contract under sections 7702(g) and (h).

• Refer to Rev. Proc. 2008-42, 2008-29 I.R.B. 160, available at www.irs.gov/irb/2008-29_IRB/ar19.html.
• Use code 7 with code A or code B, if applicable.
• Generally, use code 7 if no other code applies.
• Don't use code 7 for a Roth IRA.
• Code 1 must be used even if a taxpayer is 59 and 1/2 or older and he or she modifies a series of substantially equal periodic payments under section 72(q), (t), or (v) before the end of the 5-year period.

*Used with code (if applicable): A, B, or D

Use code 8 for an IRA distribution under section 408(d)(4), unless code P applies.

• Also, use this code for corrective distributions of excess deferrals, excess contributions, and excess aggregate contributions, unless code P applies.
• Refer to Corrective distributions on page 6 and IRA Revocation or Account Closure on page 3 for more information.

*Used with code (if applicable): 1, 2, 4, B, or J.

Use code 9 to report premiums paid by a trustee or custodian for current life or other insurance protection. Refer to box 2a beginning on page 8 for more information.

*Used with code (if applicable): None

Use code A only for participants born before January 2, 1936, or their beneficiaries to indicate the distribution may be eligible for the 10-year tax option method of computing the tax on lump-sum distributions (on Form 4972, Tax on Lump-Sum distributions). To determine whether the distribution may be eligible for the tax option, you need not consider whether the recipient used this method (or capital gain treatment) in the past.

*Used with code (if applicable): 4 or 7

Use code B for a distribution from a designated Roth account. But use code E for a section 415 distribution under EPCRS (see code E) or code H for a direct rollover to a Roth IRA.

*Used with code (if applicable): 1, 2, 4, 7, 8, G, L, P, or U

Use code C for “reportable death benefits” which means amounts paid by reason of the death of the insured under a life insurance contract that has been transferred in a reportable policy sale.

Use code D for a distribution from any plan or arrangement not described in sections 401(a), 403(a), 403(b), 408, 408A, or 457(b).

*Used with code (if applicable): 1, 2, 3, 4, or 7

Refer to distributions under Employee Plans Compliance Resolutions System (EPCRS) on page 6.

*Used with code (if applicable): None

Refer to Charitable gift annuities on page 10 (Form 1099-R Instructions). For details on entering this into Lacerte visit here.

*Used with code (if applicable): None

Use code G for a direct rollover from a qualified plan, section 403(b) plan, or a governmental section 457(b) plan to an eligible retirement plan (another qualified plan, a section 403(b) plan, a governmental section 457(b) plan, or an IRA).

• Refer to Direct Rollovers on page 3. Also, use code G for IRA rollover contributions to an accepting employer plan and for IRRs.
• Don't use code G for a direct rollover from a designated Roth account to a Roth IRA. Use code H.

*Used with code (if applicable): 4 or B

Use code H for a direct rollover of a distribution from a designated Roth account to a Roth IRA.

*Used with code (if applicable): 4

Use code J for a distribution from a Roth IRA when code Q or code T doesn't apply. But use code 2 for an IRS levy and code 5 for a prohibited transaction.

*Used with code (if applicable): 8 or P

Use code K, Distribution of traditional IRA assets not having a readily available FMV, to report IRA distributions of assets that do not have readily available fair market values, such as for the following.

• Stock, other ownership interest in a corporation, short or long-term debt obligations, not readily tradable on an established securities market
• Ownership interest in a limited liability company, partnership, trust, or similar entity (unless the interest is traded on an established securities market)
• Real estate
• Option contracts or similar products not offered for trade on an established option exchange
• Other asset that does not have a readily available FMV

Code K may be used with codes 1, 2, 4, 7, 8, or G. 

Don't use code L to report a loan offset. Refer to Loans Treated as distributions on page 7.

*Used with code (if applicable): 1, 4, or B

Use code N for a recharacterization of an IRA contribution made for [current tax year] and recharacterized in [current tax year] to another type of IRA by a trustee-to-trustee transfer or with the same trustee.

*Used with code (if applicable): None

Use code M for a qualified plan loan offset (which typically a type of plan loan offset due to severance from employment or termination of the plan).

*Used with code (if applicable): 1, 2, 4, 7, or B.

See the explanation for code 8. The IRS suggests that anyone using code P for the refund of an IRA contribution under section 408(d)(4), including excess Roth IRA contributions, advise payees, at the time the distribution is made, that the earnings are taxable in the year in which the contributions were made.

*Used with code (if applicable): 1, 2, 4, B, or J

Use code Q for a distribution from a Roth IRA if you know that the participant meets the 5-year holding period and:

• The participant has reached age 59 and 1/2
• The participant died, or
• The participant is disabled.

If any other code, such as 8 or P, applies, use code J.

*Used with code (if applicable): None

Use code R for a recharacterization of an IRA contribution made for [prior tax year] and recharacterized in [current tax year] to another type of IRA by a trustee-to-trustee transfer or with the same trustee.

*Used with code (if applicable): None

Use code S only if the distribution is from a SIMPLE IRA in the first 2 years, the employee/taxpayer hasn't reached age 59 and 1/2, and none of the exceptions under section 72(t) are known to apply when the distribution is made.

• The 2-year period begins on the day contributions are first deposited in the individual's SIMPLE IRA.
• Don't use code S if code 3 or 4 applies.

*Used with code (if applicable): None

Use code T for a distribution from a Roth IRA if you do not know if the 5-year holding period has been met but:

• The participant has reached age 59 and 1/2
• The participant died, or
• The participant is disabled.

*Used with code (if applicable): None

Use code U for a distribution of dividends from an employee stock ownership plan (ESOP) under section 404(k). These are not eligible rollover distributions. Don't report dividends paid by the corporation directly to plan participants or their beneficiaries. Continue to report those dividends on Form 1099-DIV.

*Used with code (if applicable): B

Use code W for charges or payments for purchasing qualified long-term care insurance contracts under combined arrangements which are excludable under section 72(e)(11) against the cash value of an annuity contract or the cash surrender value of a life insurance contract.

*Used with code (if applicable): 6