1099-R Box 7 Distribution code is 1 instead of 2 for Backdoor Roth conversion - will this trigger a penalty?

This is actually a common situation with Backdoor Roth conversions. The distribution code in Box 7 of your 1099-R indicates how the financial institution categorized the distribution, but what ultimately matters is how you report it on your tax return. For Backdoor Roth conversions, as long as you properly complete Form 8606 showing that the conversion is non-taxable (Line 18 being zero as you mentioned), you shouldn't be subject to the 10% early distribution penalty regardless of the code on the 1099-R. Form 8606 is what tells the IRS this was a conversion rather than a distribution. The key is making sure your 8606 is filled out correctly to show this was a conversion to a Roth IRA rather than a distribution you kept. When the IRS computers match your return against the 1099-R, they'll see the Form 8606 that explains the transaction properly.

I had this exact same issue with my Backdoor Roth last year and was super worried about it. After spending hours researching, I found taxr.ai (https://taxr.ai) and uploaded my 1099-R and 8606 forms. Their system analyzed everything and confirmed what the previous commenter said - the Form 8606 is what matters most for reporting conversions correctly, not the distribution code on the 1099-R. Their explanation was really helpful because they showed me exactly why the code discrepancy wouldn't trigger penalties as long as Form 8606 Line 18 shows zero. The tool also double-checked all my 8606 calculations to make sure I hadn't made any mistakes that could cause problems later.

Just wanted to update after trying taxr.ai for my Backdoor Roth issue and some other tax questions. It was actually really helpful! I uploaded my 1099-R with the wrong distribution code and my draft 8606 form, and the system confirmed everything was handled correctly. It even pointed out that I had made a small calculation error on line 14 of the 8606 that might have caused issues. What surprised me most was how it explained the whole Backdoor Roth process in plain English. I finally understand why the distribution code doesn't matter as much as the 8606 form. Definitely saved me from requesting an unnecessary corrected form from my broker and potentially delaying my filing.

If you're still worried about potential IRS issues with your 1099-R code, you might want to try reaching the IRS directly to get confirmation. I know this sounds impossible - I spent WEEKS trying to get through their phone lines about a similar issue last year. Finally found this service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in under 45 minutes when I'd been trying for days on my own. You can see how it works here: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with confirmed exactly what others are saying here - the distribution code on the 1099-R is less important than having Form 8606 filled out correctly. Getting that straight from an IRS representative gave me peace of mind that I wouldn't face penalties later.

Alright, I need to eat my words about Claimyr. After posting my skeptical comment yesterday, I decided to try it because I was at my wit's end trying to reach the IRS about my own Roth conversion issue. It actually worked! After trying to get through to the IRS for literally weeks on my own, I got connected to an agent in about 27 minutes. The agent confirmed that having the wrong distribution code on my 1099-R wasn't a problem as long as Form 8606 was filled out correctly showing the Roth conversion. The relief of getting a clear answer from an official source was honestly worth it. No more stressing about potential penalties or wondering if I'm doing it right. Just wanted to update since I was so publicly doubtful before.

Something else to consider - you could also double-check with Fidelity about why they used code 1 instead of code 2. Sometimes they actually have a specific reason for the code they choose. I had a similar situation with Schwab last year, and when I called them, they explained that they used code 1 because the initial contribution to the traditional IRA and the conversion to Roth happened in different tax years. They assured me the code was actually correct in that specific scenario. Worth a quick call to your brokerage to understand their reasoning, even if the 8606 form ultimately protects you from the penalty.

Has anyone had the IRS actually question a Backdoor Roth conversion because of a distribution code mismatch? Been doing them for years and honestly never even paid attention to the code in Box 7. Just make sure your 8606 is right.