Question about Form 1099-R (Backdoor Roth Conversion)

Today, I received the 2015 1099-R form for my wife's IRA from our brokerage firm. I see $11K listed in Box 1/2a and both boxes in Box 2b are checked. Box 4 says $0. Box 7 says 02 (early distribution).

My understanding is the $11K is not subject to any tax since the money is sitting in a Roth IRA, and we funded the IRA with post-tax income. Furthermore, during backdoor Roth IRA conversion, my wife didn't have an existing IRA so there was nothing to tax either. Is his correct?

My question: When I file our 2015 taxes, how do I account for this? I use H&R Block software. My thinking is if I just enter these numbers into the form, the software will treat this as distribution and indicate that I owe tax on it. ==================== The conversion itself is a taxable event. However, you are allowed to subtract your non-deducted basis. See form 8606. On the form, it should net to zero (based on your facts). If it doesn't, you have input it incorrectly. Understanding your chosen software is going to be your problem - in general, we don't use that here.

Your box 7 code 02 means "early distribution - EXCEPTION APPLIES" (emphasis added).

Tax software, and even the 1099-R, handle these situations very badly. The financial institution doesn't even know how much of the distribution is taxable, and indeed they can't know.

You'll just have to make the adjustments manually. Report $11K as the distribution amount and $0 as the taxable amount.

I've had this situation a number of times. Always done it this way and never had a problem (except with the software).

On the contrary, tax software handles the situations quite well. For distributions from a (traditional) IRA with basis, the basis is allocated to distributions and conversions on a proportionate basis (calculating over all traditional IRAs). You _may not_ use any other allocation method.

Distributions from a Roth IRA are taken first from contributions, next from conversions, and finally from income. It also doesn't matter which Roth IRA you take the distributions from. Here, you theoretically could choose a different distribution, but it would give you a penalty now instead of possibly later.

I don't want to get into a spitting match, but my own experience is that tax software doesn't handle them well.

However, it may depend.

If you are using different tax software every year, or if it's low-grade stuff like TurboTax, it might not have your whole basis history. Professional-grade tax software might keep this information.

The financial institution doing the Roth conversion can't possibly know how much is taxable. Even if you had no basis in the conversions at that institution, you could have a basis in other IRA's.

In any case, if the conversion is "clean" (i.e. you have no pre-tax money in any IRA's anywhere) you can just report the taxable amount as zero.