What does Distribution Code 1 signify on Form 1099-R?

Distribution Code 1 on Form 1099-R specifically indicates that the distribution is an early withdrawal from a retirement account, such as an IRA or 401(k), and there is no known exception to the penalty. This means that the funds were taken out before the account holder reached the age of 59½, and as a result, the distribution is generally subject to an additional 10% early withdrawal penalty.

In the context of retirement accounts, it is important for individuals to understand the implications of early distributions, as they may incur penalties and tax liabilities that can significantly affect their overall financial situation. The designation of Code 1 serves to alert the taxpayer and the IRS of the potential penalties that may be applicable due to the premature nature of the distribution.

Other codes mentioned in the options relate to different situations regarding retirement distributions. For example, the standard distribution without penalties typically would not apply to early withdrawals, and distributions due to death or disability have their own specific codes indicating those circumstances. Therefore, the significance of Distribution Code 1 is clear as it pertains specifically to early withdrawals without exceptions.