Why it matters
A retirement distribution can be fully or partly taxable, and the distribution code tells the preparer whether an early distribution penalty or a rollover rule applies. Reporting only the gross amount can overstate or understate the tax.
Example
A client takes a distribution from an IRA. The custodian sends Form 1099-R with the gross amount, the taxable amount and a code, and the preparer reports it on the individual return.
Related terms
Questions about Form 1099-R
Is a rollover reported on Form 1099-R?
Yes. The distribution is reported, and the form or the taxpayer's records show the rollover. The preparer uses the code and the rollover documentation to determine the taxable amount.
What does the distribution code mean?
The code describes the type of distribution, such as a normal distribution, an early distribution or a direct rollover. The preparer needs the code to apply the correct rule.