I got my Vanguard 1099Rs and called to complain about being coded as "1" (no exception) instead of "2".
They said pretty much what Intercst said -- they were told by IRS not to use "2" anymore - use "1" and let the taxpayer deal with it using form 5329.
Maybe instead of using the poor excuse that they were told by the IRS, Vanguard should do their own tax research like I did. Looks like a typo on the part of some shmuck at the IRS on the original instructions. You'll see the instructions back to normal next year, I'm sure. I posted the answer below, but you can get it at the source almost at the end of the page at http://www.irs.gov/formspubs/article...109875,00.html
Notice — Change to 2004 Instructions for Forms 1099-R and 5498: Guide to Distribution Codes
The Explanations for Codes 1 and 2 shown in the Guide to Distribution Codes for box 7 have been changed. If you have issued a Form 1099-R (or applicable substitute), you may have to issue a corrected return based on the change in the chart below.
Used with code ... (if applicable)
1—Early distribution, no known exception
Use Code 1 only if the employee/taxpayer has not reached age 59˝ and you do not know if any of the exceptions under Distribution Code 2, 3, or 4 apply. Use Code 1 even if the distribution is made for medical expenses, health insurance premiums, qualified higher education expenses, or as a first-time homebuyer, under section 72(t)(2)(B), (E), or (F).
8, D, L, or P
2—Early distribution, exception applies
Use Code 2 only if the employee/taxpayer has not reached age 59˝ and the distribution is:
A Roth IRA conversion (an IRA converted to a Roth IRA) or a reconversion.
A distribution made from a qualified retirement plan or IRA (Roth IRA) because of an IRS levy under section 6331.
A section 457(b) plan distribution that is not subject to the additional 10% tax. But see Section 457(b) plan distributions under the box 7 instructions in the 2004 Instructions for Forms 1099-R and 5498 for information on distributions that may be subject to the 10% additional tax.
A distribution from a qualified retirement plan after separation from service where the taxpayer has reached age 55.
A distribution that is a part of a series of substantially equal periodic payments as described in section 72(q), (t), and (v).
Any other distribution subject to an exception under section 72(q), (t), and (v) that is not required to be reported using Code 1, 3, or 4.
8, D, or P
This information supplements the 2004 Instructions for Forms 1099-R and 5498 which are not being revised at this time. --09-AUG-2004