Updated September 28, 2026. Quick answer: code S is the SIMPLE IRA version of code 1: a distribution before 59½ where the payer does not know an exception applies. The important difference is the rate. Inside the first 2 years of participation, the additional tax is 25%, not the usual 10%.
Form 5329 for 2025, read code by code: Form 5329 lines 1 to 4 and Form 5329 exception code 12.
What the IRS tells the payer
From the current instructions, code S is “Early distribution from a SIMPLE IRA in the first 2 years, no known exception”. The full instruction text reads: “Use code S only if the distribution is from a SIMPLE IRA in the first 2 years, the employee/taxpayer has not reached age 59½, and none of the exceptions under section 72(t) are known to apply when the distribution is made. The 2-year period begins on the day contributions are first deposited in the individual’s SIMPLE IRA. Do not use code S if code 3 or 4 applies.” It may be used with: J.
Why the rate is higher
The Instructions for Form 5329 state the mechanics directly: “If any amount on line 3 was a distribution from a SIMPLE IRA received within 2 years from the date you first participated in the SIMPLE IRA plan, you must multiply that amount by 25% instead of 10%. These distributions are included in boxes 1 and 2a of Form 1099-R and are designated with code S in box 7.” The 2-year clock starts on a fixed date, not on the date of any particular distribution. The Instructions for Forms 1099-R and 5498 say: “The 2-year period begins on the day contributions are first deposited in the individual’s SIMPLE IRA.”
The same exceptions still apply
Exactly like code 1, code S does not mean you owe the tax. The payer used code S because it did not know whether a statutory exception applied, and the same Form 5329 exceptions used for any other early IRA distribution (numbered 01 through 23, though a few such as 01 and 06 do not apply to IRAs), including medical expenses, higher education, a first home, and the rest, are available to reduce or eliminate it. They reduce the 25% rate the same way they reduce the 10% rate outside the first 2 years.
Which line it drives
The distribution is reported on the IRA distributions line of Form 1040, the same as any other traditional or SIMPLE IRA payout, with the additional tax computed on Form 5329 and carried to Schedule 2.
Common mistakes
- Assuming the standard 10% rate applies inside the first 2 years, when it is 25%.
- Not realizing the 2-year clock runs from your first SIMPLE IRA contribution ever, not from each individual deposit.
Box 7 is the payer’s claim, not the law
The code in Box 7a records what the custodian knew when it cut the cheque. It is not a ruling on what you owe, and the IRS instructions say so in as many words. On code 1 the instruction to payers is to use it “even if the distribution is made for medical expenses, health insurance premiums, qualified higher education expenses, a first-time home purchase…” and a list of other genuine statutory exceptions.
Related codes worth reading alongside this one: code J, the Roth IRA analog of a code S, and code 1, the traditional-IRA version of the same no-known-exception code.
Every code in one place: the Box 7 table. If yours looks wrong: how to fix it.
Figures verified against the IRS Instructions for Forms 1099-R and 5498 (2026), the IRS Instructions for Form 5329 (2025), and 26 U.S.C. 72(t)(6) on September 30, 2026.
Sources
- IRS, Instructions for Forms 1099-R and 5498 (2026), Table 1, Guide to Distribution Codes: https://www.irs.gov/instructions/i1099r
- IRS, Instructions for Form 5329 (2025): https://www.irs.gov/instructions/i5329
- IRS, Instructions for Form 1040 (2025): https://www.irs.gov/instructions/i1040gi
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How our partner relationships workCode meanings are read from the IRS Instructions for Forms 1099-R and 5498 (current edition, tax year 2026), Table 1, Guide to Distribution Codes, at irs.gov on September 28, 2026. General information, not tax advice. Your own facts decide the outcome, and a preparer or the IRS is the right place to confirm anything consequential.