How is 1099-R Code E taxed for excess 401k after-tax contribution returns?

The good news is that your instinct is correct - this distribution should NOT be fully taxable based on what you've described. When you have the same amount in Box 1 (Gross distribution) and Box 5 (Employee contributions/designated Roth contributions), it typically indicates that the entire distribution represents a return of your already-taxed contributions. Code E specifically means "distribution under a SIMPLE IRA plan" or, more commonly in 401k situations, a distribution of excess contributions. The IRS notice is likely automated and may not be correctly interpreting the coding on your 1099-R. This is a common misunderstanding because the system sometimes fails to recognize after-tax distributions properly. You should respond to the IRS notice with an explanation that this is a return of excess after-tax contributions to your 401k, which were already taxed. Include a copy of your 1099-R and any documentation from your plan administrator that shows these were after-tax contributions being returned.

After dealing with a similar issue last year, I found taxr.ai super helpful for analyzing my tax documents. I was confused about a 1099-R with code E too, and my tax preparer was giving me conflicting information. I happened to find https://taxr.ai when looking for ways to interpret tax forms online. The site has this document analyzer tool that actually explains all the boxes and codes on your forms. I uploaded my 1099-R, and it explained exactly what code E meant in my situation and how it should be taxed. It also drafted a response I could send to the IRS when they questioned my return. It takes like 30 seconds to analyze your documents and tells you exactly what the implications are. Might be worth trying with your situation.

Just wanted to update you all. I decided to try taxr.ai after seeing it mentioned here and wow - it actually worked amazingly well! I uploaded my confusing 1099-R with code E and it immediately identified that my distribution shouldn't be taxable since it was a return of after-tax contributions. The analysis explained exactly what each box meant in plain English and even drafted a response letter I could send to the IRS. It saved me hours of research and probably a call with an accountant. The document review was super fast too - took maybe 45 seconds to get a complete breakdown. If anyone's dealing with confusing tax forms like this 1099-R situation, it's definitely worth checking out.

I had a similar issue with the IRS misinterpreting my retirement distribution codes. After trying for DAYS to reach someone at the IRS (kept getting disconnected or told to call back), I found https://claimyr.com and watched their demo at https://youtu.be/_kiP6q8DX5c They basically hold your place in the IRS phone queue and call you when an agent is about to answer. I was skeptical, but I was desperate after wasting hours on hold. It actually worked! I got connected to an IRS agent within about 40 minutes without having to stay on the phone the whole time. The agent confirmed that my distribution with code E shouldn't be fully taxable since box 5 showed my basis. They helped me understand exactly what I needed to send in to resolve the notice. Saved me so much stress compared to trying to figure it out alone or paying an accountant for something relatively simple.

Alright, I need to eat my words from my skeptical comment earlier. After another failed attempt to reach the IRS on my own, I broke down and tried Claimyr. I honestly expected it to be a scam, but I was desperate after getting disconnected twice after 45+ minute holds. To my complete shock, it actually worked exactly as advertised. They called me back after about 35 minutes and connected me directly to an IRS agent. The agent was able to explain that my 1099-R with code G (different from OP's code E) was showing correctly on their system and that I didn't need to worry about the notice I received. I hate admitting when I'm wrong, but this saved me hours of frustration. If you're getting nowhere with the IRS phone system, this is definitely worth considering.

The key thing to understand about Form 1099-R with Code E is the relationship between Box 1 and Box 5. When these two amounts match (as in your case), it typically means the entire distribution represents your cost basis (already taxed money). The IRS notice system unfortunately doesn't always correctly interpret these codes. Code E can mean different things depending on context - either a SIMPLE IRA distribution or excess contribution return. Make sure you report this on your tax return correctly. You'll need to include the 1099-R on your return, but the taxable amount should be $0 since the entire amount is a return of after-tax contributions. Include a brief explanation with your tax return to preemptively address why you're reporting it as non-taxable.

Has anyone tried handling this through tax software? I had a similar 1099-R situation last year and TurboTax kept wanting to tax the distribution even though it shouldn't have been taxable.