1099-R Code 5: Prohibited Transaction

Self-dealing or another forbidden arrangement disqualified the whole account, which is treated as fully distributed.

What the IRS instructions say

Official meaning, from the Instructions for Forms 1099-R and 5498 A prohibited transaction occurred involving the IRA; the account is no longer an IRA.

Is it taxable, and does the 10 percent penalty apply?

Fully taxable. A prohibited transaction disqualifies the entire IRA as of the first day of that year, so the whole fair market value is treated as distributed and is ordinary income for a traditional IRA. If you are under 59 and a half, the 10 percent additional tax generally applies to the taxable amount, and none of it can be rolled over, because the account is no longer an IRA.

Worth knowing: Prohibited transactions include self-dealing such as borrowing from the IRA, using it to secure a loan, or buying property that you or another disqualified person use. These come up most with self-directed and gold IRAs, where the account holds real estate or metals.

If this code looks wrong

The IRS matches Box 7 against your return, so start with the payer: request a corrected 1099-R, which is the IRS's standing instruction for incorrect forms. No corrected copy by the end of February? The IRS can contact the payer for you, and Form 4852 substitutes as a last resort. Remember that an indirect 60-day rollover is correctly coded 1 or 7, because the payer cannot see the redeposit; direct rollovers should show G or H, as our rollover guide explains before the paperwork ever gets cut.

← All 1099-R Box 7 codes

Sources: IRS Instructions for Forms 1099-R and 5498; IRS Tax Topics 558 (early distributions), 413 (rollovers), and 154 (incorrect forms). Verified July 2026.

General educational information, not tax advice. Your distribution's taxation depends on your facts; consult a qualified tax professional. ClearChoiceRadar is not affiliated with the IRS or any government agency.