If a taxpayer receives a distribution under an exception to penalty, which distribution code would be used?

When a taxpayer receives a distribution under an exception to the early withdrawal penalty, Distribution Code 2 is the appropriate choice. This code is specifically assigned to distributions that meet certain criteria allowing for penalty-free withdrawals prior to reaching the age of 59½. These criteria may include situations such as permanent disability, certain medical expenses, or distributions made to alleviate hardships.

It's essential to properly classify these distributions using the correct distribution code, as it helps to accurately reflect the taxpayer's situation and ensures compliance with tax regulations. Using Distribution Code 2 also indicates to the IRS that the distribution qualifies for an exception, thereby avoiding additional penalties that typically apply to early withdrawals.