The 1099-R, issued to individuals, reports retirement income to the IRS that they receive from a qualified retirement plan, such as a 401K, IRA or pension plan. It also reports the taxable portion of those benefits along with any taxes withheld. The IRS requires that payments be identified by distribution codes.
Distribution codes categorize the payments based on several factors. In Form 1099-R, Distribution codes appear in box 7. The codes, as accountants and financial experts know, are important because they determine if the IRS views the distribution as taxable or tax-exempt.
New Coding Rules introduced in 2023
In 2023, the IRS changed the distribution code for some disability retirees from a Code 3 to a Code 2 or 7. Here are the basics of that change:
Before 2023 all disability retirement payments were coded using distribution code 3. To be compliant with IRS regulations, the distribution codes for some disability retirees changed from code 3 to either code 2 or 7 for 2023. Distribution code 3 is intended for those who are totally disabled. This will remain in effect.
For example, if an individual was granted a disability retirement because they cannot perform their regular job duties but can work in other capacities, distribution code 3 does not apply. In that case, their benefit will be coded as distribution code 2 if they are under age 59 ½ or distribution code 7 if they are 59 ½ or older. Distribution code 3 is used by the IRS to determine eligibility for a tax credit that is only available to individuals receiving taxable disability benefits.
1099-R Distribution Code Updates for 2024
For tax year 2024, there are no modifications to the 1099-R box 7 coding.
Below is a table that outlines the valid code(s) used to categorize payments.
Distribution Code Matrix
Code | Used with, if applicable |
1—Early distribution, no known exception. | 8, B, D, K, L, M, or P |
2—Early distribution, exception applies. | 8, B, D, K, L, M, or P |
3—Disability | D |
4—Death | 8, A, B, D, G, H, K, L, M, or P |
5—Prohibited transaction. | None |
6—Section 1035 exchange | W |
7—Normal distribution. | A, B, D, K, L, or M |
8—Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2024. | 1, 2, 4, B, J, or K |
9—Cost of current life insurance protection | None |
A—May be eligible for 10-year tax option. | 4 or 7 |
B—Designated Roth account distribution | 1, 2, 4, 7, 8, G, L, M, P, or U |
C—Reportable death benefits under section 6050Y | D |
D—Annuity payments from nonqualified annuities and distributions from life insurance contracts that may be subject to tax under section 1411 | 1, 2, 3, 4, 7, or C |
E—Distributions under Employee Plans Compliance Resolution System (EPCRS). | None |
F—Charitable gift annuity. | None |
G—Direct rollover and direct payment | 4, B, or K |
H—Direct rollover of a designated Roth account distribution to a Roth IRA. | 4 |
J—Early distribution from a Roth IRA | 8 or P |
K—Distribution of traditional IRA assets not having a readily available FMV | 1, 2, 4, 7, 8, or G |
L—Loans treated as deemed distributions under section 72(p). | 1, 2, 4, 7, or B |
M—Qualified plan loan offset | 1, 2, 4, 7, or B |
N—Recharacterized IRA contribution made for 2024 | None |
P—Excess contributions plus earnings/excess deferrals taxable in 2023 | 1, 2, 4, B, or J |
Q—Qualified distribution from a Roth IRA | None |
R—Recharacterized IRA contribution made for 2023 | None |
S—Early distribution from a SIMPLE IRA in the first 2 years, no known exception. | None |
T—Roth IRA distribution, exception applies. |
|
U—Dividends distributed from an ESOP under section 404(k) | B |
W—Charges or payments for purchasing qualified long-term care insurance contracts under combined arrangements | 6 |