What does Distribution Code 3 indicate on Form 1099-R?

Distribution Code 3 on Form 1099-R indicates that the distribution was made due to the recipient's disability. This code is used to inform the IRS that the funds were withdrawn because the individual met the criteria for being considered disabled under the IRS rules. Such distributions may also have different tax treatment compared to regular early withdrawals, as individuals receiving funds due to a disability may avoid the additional tax penalty associated with early distributions from retirement accounts.

In the context of retirement accounts, this code provides clarity on the specific reason for the distribution, which can be crucial for determining how that income will be taxed and ensuring compliance with tax regulations. Understanding this code helps taxpayers make informed decisions regarding their tax filings and potential implications of their retirement distributions.