Questions About Form 1099-R Code 2

[workhard2022]

Case Part 1:  The client changed jobs and forgot about her retirement $ from her last job. So her prior employer closed her 457(B) account and sent a check of $672 to her for indirect rollover. The 1099-R shows a total distribution of $840 with $168 federal tax withholding and Code-2 "early distribution with the exception"(Box 1 $840; Box 2a $840; Box 2b only "Total distribution" marked; ). She deposited the check and another $168 out-of-pocket contribution to her new IRA account AFTER 60 days.

My questions are: (1) In her situation, the $840 distribution is taxable or non-taxable? (2) does she have to pay a 10% penalty for more than 60 days of rollover? Proconnect doesn't show a form 5329 since it is Code 2. (3) How much is subject to a 10% penalty--$840 or $672? 

Case Part 2 (this is the second part of the case): The client later converted $840 IRA contribution ($672 indirect rollover plus $168 out-of-pocket contribution) to a Roth IRA (backdoor Roth, her income is above threshold and IRA contribution are nondeductible).  (She had a Form 5498 for traditional IRA showing the contribution of $168, and a Form 5498 for Roth conversion showing amount $840) Also, she received another form 1099-R (box 1 & 2 shows $840; Box 2b all Marked; Box 7 Code 2 again with a mark "X").

My question to case Part 2:  Is this $840 distribution taxable or non-taxable?

Thank you!

[sjrcpa · Accepted solution]

Apparently you are also ayhn

https://accountants.intuit.com/community/proconnect-tax-discussions/discussion/1099-r-code-2-backdoo...

Please don't post twice. Better to add these facts to your original post.

[qbteachmt]

There was no reason to start again, and those volunteers already helping have put some good info where you first asked. Also, now other volunteers would need to know to follow your topic across multiple postings.

The details here are the clarity that should have been put on the original topic. This is a discussion, and your participation is how you get the help you need.

[qbteachmt]

Please go to your original topic, where good info is being provided.

I will copy here for reference, in case others find your topic here:

Please stop applying the word "backdoor" to anything here. That's an entirely different process. You seem to treat these activities as synonyms, but they are not. Let me help:

"backdoor Roth, her income is above threshold and IRA contribution are nondeductible)"

The Trad IRA would be made as nondeductible if you are taking advantage of the Backdoor provision. That's because the person can't contribute to a Roth based on income thresholds, but your taxpayer is not making a contribution. This entire scenario is not Contribution. It's not New Money. That's also why income levels have nothing to do with your taxpayer's scenario. All of this is misleading for the issue: backdoor, nondeductible, contribution, and income levels. Those are for an entirely different situation.

Your taxpayer has funds from an employer, and you are trying to determine if they were handled properly for distribution, rollover and conversion. These three words: distribution, rollover, conversion.

Also:

"pay a 10% penalty for more than 60 days of rollover"

That penalty is because of Early Distribution. Not because of missing the rollover deadline. There is no penalty for doing something that isn't even allowed. It would be undone, if not allowed. There are extra costs, for ignoring something that should not have been done and doesn't get undone.