1099-R Distribution Code

L1: 1099-R Distribution Code

I have an IRA setup using the 72(t) rule since 2006. Normally, the 1099-R distribution code is a 2Beginning with the 4th year of the 72(t) in January 2009, I turned 59 1/2.All 2009 distributions from this 72(t) IRA were made after I turned 59 1/2 so I was expecting a code 7 but the IRA custodian is still using a 1099-R distribution code 2. The custodian said that I had to have the code 2 because I’m stillreceiving the distributions under the 72(t)rule. Is this true?This complicates my state taxes because I do not have topay any tax on any distributions after 59 1/2 but the code 2 implies I’m under 59 1/2.Per the IRS:Use Code 2 only if the employee/taxpayer has not reached age 59 1/2 and you know the distribution is: (blah, blah, blah)

2010-03-23 18:15, By: ding777, IP: [98.239.179.247]

L2: 1099-R Distribution CodeYou apparently do not understand the rules about SEPP 72-T, and may not have understood them when you set up your plan in 2006.The distributions under SEPP 72-T MUST continue until the LATER OF age 59 1/2 or FIVE YEARS !!!Until you complete 60 months under the plan from its inception, you are required to continue the same annual distributions, and distributions after 59 1/2 do not change to a code 7 until you complete the 5 years.However, I believe that the distributions after 59 1/2 are still “retirement plan distributions”, and not taxable for your state income tax if that is the regulation. By the way, in PA, distributions after 59 1/2 are not taxed, but also distributions before 59 1/2 are taxable only to the extent thatthey exceed the total cumulative contributions. This is called the “cost recovery method” in PA.2010-03-23 19:03, By: dlzallestaxes, IP: [173.49.30.37]

L3: 1099-R Distribution CodeI disagree with the prior post. The instructions for Form 1099R, p 11 clearly state that the 1099R should be coded with a 7 after age 59.5 UNLESS the SEPP has been modified (ie busted). This is clarified both under the instructions for use of Code 1 and also for Code 7.Since your custodian had been using a Code 2, they had been recognizing your SEPP, otherwise they would have been using a 1 in the past. Since they continue to use a 2, we have not recommended filing a 5329 simply to change it to a 7 since there is no advantage under federal rules and Form 5329 is not really designed for changing a code other than 1. Therefore, if you feel your state will cause you a problem because of the 2 coding, you should try to get the 1099R revised to a 7 code by referring the IRA custodian to the reference cited above.The reason this is important is because the 5329 is not designed to change a code from one non penalty code to another. It is designed to change an early distribution code 1 to show that a penalty exception applies. Age 59.5 is not listed among those penalty exceptions, so securing the 1099R revision becomes more importantif you want to avoid having to produce a birth Cert to get your state benefit.2010-03-23 23:28, By: Alan S., IP: [24.116.165.60]

L4: 1099-R Distribution CodeHi Alan- I agree with you.
From personal experience working to resolve this issue forsome of my clients- here’s what usually happens:

The Custodian sets up the distribution with a code 2.
Their system is not designed to automatically change the code to 7 when the client reaches age 59 _. So, Code 2 continues.
They will (should) change it, at least when it is brought to their attention.

ding777, you should contact the custodian again. Be firm (or firmer) this time. Demand to speak with someone else if the person with whom you are speaking does not understand the rules. Tell them, that by not following the IRS rules for tax reporting, they may cause your Tax Return to be flagged for audit. Don’t take no for an answer. You have the rules, straight from the IRS- on your side.2010-03-24 12:49, By: Denise Appleby, IP: [24.99.245.91]

L5: 1099-R Distribution CodeThank-you Alan and DeniseI contacted the Custodian again andthey promised to correct the 1099-R.2010-03-29 13:50, By: ding7777, IP: [98.239.179.247]