Regarding a 1099-R, are the codes in box 2 and box 7 compatible?

by Shane R. Fisher, CPA | Aug 24, 2018

I am getting conflicting answers concerning a 1099-R. On a 1099-R, in box 2, there is a taxable amount for an early distribution from a pension fund. That money was rolled into an IRA immediately. In box 7, the code is 2 G. Are these codes compatible? Can you tell me where in the tax code it says that they are or are not?

From what I can find from the IRS code, the distribution code 2 in box 7 on the 1099-R was used because the individual was not 59 1/2 when the distribution was made. However, the individual rolled over the pension into a traditional IRA right away, which generally would qualify for code G in box 7. If the employer that held the pension account withheld any money from the original balance of the pension funds, then it is on the individual to replace the funds that were held for taxes to make sure the same amount that came from the pension get rolled over into the traditional IRA. If the employer withheld, say, 10 percent (which is often the amount that is withheld from a retirement distribution to pay any tax liability), then that individual must pay that difference out of pocket and claim the refund for the amount that was withheld.

In broader terms, Pension A is $100, your employer withheld 10 percent ($10) when they distributed it to you, so it was not rolled over into the traditional IRA. The individual may have a taxable amount ($10) if they do not make the traditional IRA whole out of their own pocket (getting the balance back up to the original $100). They can then receive the $10 withheld through filing their return for the overpayment of income tax in which no taxable distribution was made.

It sounds like that 10 percent may not have been paid back into the traditional IRA, which would lead to a taxable amount in box 2. On top of that being a taxable amount now, it is also subject to an early distribution penalty since it was, in essence, money received prior to them being 59 1/2. I would encourage the individual to contact the pension administrator to determine if that was the case. The tax code section the individual would reference would be Section 72(t).  

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Answered by: Shane R. Fisher, CPA, is vice president of finance at TriCorner Homes in Harrisburg, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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