Traditional to Roth Rollover

[MilTaxEA]

I have a client who makes too much money to directly contribute to a Roth IRA. Instead he took advantage of making a non-deductible contribution to his Traditional IRA and then rolled that over to his Roth IRA (the so-called "backdoor Roth IRA contribution").

This is the first year I've had a client under retirement age do this, so I have a question about the distribution codes on the 1099-R forms. The TIRA 1099-R has a distribution code of 02 (distribution with known exception), however the Roth IRA 1099-R has a distribution code of N (re-characterization).

Is this how a rollover from a Traditional to Roth is supposed to look? Or should the distribution codes be different? Seeing the "re-characterization" code made me nervous that this might not be a true "conversion", even though it was a trustee-to-trustee transfer.

Any thoughts?

[Gary2]

I have a client who makes too much money to directly contribute to a Roth IRA. Instead he took advantage of making a non-deductible contribution to his Traditional IRA and then rolled that over to his Roth IRA (the so-called "backdoor Roth IRA contribution").

This is the first year I've had a client under retirement age do this, so I have a question about the distribution codes on the 1099-R forms. The TIRA 1099-R has a distribution code of 02 (distribution with known exception), however the Roth IRA 1099-R has a distribution code of N (re-characterization).

Is this how a rollover from a Traditional to Roth is supposed to look? Or should the distribution codes be different? Seeing the "re-characterization" code made me nervous that this might not be a true "conversion", even though it was a trustee-to-trustee transfer.

Why is there any 1099-R from the Roth IRA? Is it possible that he made the mistake of first putting money into the Roth, then recharacterized it as a traditional IRA contribution, then did the rollover?

If so, I think it's ok. The amount on the first 1099-R is still taxable (subject to basis calculations on Form 8606). The amount on the second isn't. The funds are still locked inside an IRA, so it makes sense that there's no 10% penalty. The only suspicious thing is the initial traditional-to-Roth loophole, which is Congress's fault.

[MilTaxEA]

Why is there any 1099-R from the Roth IRA? Is it possible that he made the mistake of first putting money into the Roth, then recharacterized it as a traditional IRA contribution, then did the rollover?

You were exactly correct! I just talked to the client and he said that he accidently made the Roth contribution directly and had to do the recharacterization before converting.

Thanks!