Previous studies exploring the cost of reading sentences with words that have two transposed letters in adults showed that initial letter transpositions caused the most disruption to reading, indicating the important role that initial letters play in lexical identification (e.g., Rayner et al., 2006). Regarding children, it is not clear whether differences in reading ability would affect how they encode letter position information as they attempt to identify misspelled words in a reading-like task. The aim of this experiment was to explore how initial-letter position information is encoded by children compared to adults when reading misspelled words, containing transpositions, during a reading-like task. Four different conditions were used: control (words were correctly spelled), TL12 (letters in first and second positions were transposed), TL13 (letters in first and third positions were transposed), and TL23 (letters in second and third positions were transposed). Results showed that TL13 condition caused the most disruption, whereas TL23 caused the least disruption to reading of misspelled words. Although disruption for the TL13 condition was quite rapid in adults, the immediacy of disruption was less so for the TL23 and TL12 conditions. For children, effects of transposition also occurred quite rapidly but were longer lasting. The time course was particularly extended for the less skilled relative to the more skilled child readers. This pattern of effects suggests that both adults and children with higher, relative to lower, reading ability encode internal letter position information more flexibly to identify misspelled words, with transposed letters, during a reading-like task.