1099-R question

[mhcpa1964]

Hello all,

Client was issued a 1099-R in 2021 with the below information.
Box 1 gross distribution = $7,000
Box 2a Taxable amount = $7,000
Box 2b = checked for taxable amount not determined
Box 7 = 2, which is Early Distribution not from Roth, exception applies

In 2020, client contributed $7000 to Roth. Her income exceeded the Roth contribution limit, so she asked her financial advisor to recharacterize the contribution. Fast forward to 2021 and client has the above 1099R regarding the recharacterization.

Question - When the Box 2b is checked does that mean the figure in Box 2a can be changed? I believe Box 2 should be $0. Client contributed to a Roth and then had it reversed. There's no tax effect for this recharacterization in this example. I think Box 2a should be $0.

The distribution code 2 indicates the account was NOT a Roth. My notes in her file indicate the deposit was to a Roth as does her 2020 Form 5498, so I'm not sure why the financial institution used code 2. Perhaps this is why Box 2b isn't accurate.

Hope to hear from you. I'll also have the client email their fin'l advisor for clarification.

[FEDUKE404]

Are your sure the 1099-R is for funds removed from a ROTH account?
Corrective removals, such as putting too much funds into a Roth, usually have code "J" in box 7. The 1099-R will show the gross corrective distribution, and then show the (calculated by institution) taxable amount which represents the "bad" earnings while the excess funds remained in the account. Dependent on timing, the 1099-R may have codes that requires an amended return. And there may be two 1099-Rs for the same correction.
Your situation sounds like what actually happened was taking $7k from a taxable retirement account (401k or traditional IRA) and placing those funds into a Roth. If that is the case, the entire distribution WOULD be taxable. Also Part II of Form 8606 would be required.
There is often a difference between what the client THOUGHT was done versus what REALLY happened. . .

[Rapid Robert]

"The distribution code 2 indicates the account was NOT a Roth."

Where are you getting that conclusion?

"When the Box 2b is checked does that mean the figure in Box 2a can be changed?"

This box does not determine what is reported in Box 2a. Per instructions for 1099-R,

"Generally, you are not required to compute the taxable amount of a traditional, SEP, or SIMPLE IRA or designate whether any part of a distribution is a return of basis attributable to nondeductible contributions. Therefore, except as provided below or elsewhere in these instructions, report the total amount distributed from a traditional, SEP, or SIMPLE IRA in box 2a. This will be the same amount reported in box 1. Check the “Taxable amount not determined” box in box 2b."

"she asked her financial advisor to recharacterize the contribution."

Re-characterize to traditional IRA contribution, or withdraw the excess? Which year did this occur?

"There is often a difference between what the client THOUGHT was done versus what REALLY happened. . ."

Agree. Try to get the 2021 Form(s) 5498 for these accounts, should be available by now.

[mhcpa1964]

Thanks gang.