Rollover from traditional IRA to ROTH IRA - what distribution code should be in box 7 of 1099-R?

The distribution code on your 1099-R is important to get right because it affects how the IRS views your transaction. In your case, code 2 indicates an "early distribution, exception applies" which isn't exactly right for your situation. Since you made non-deductible contributions to your traditional IRA (meaning you already paid tax on that money), you shouldn't have to pay tax on those contributions again when converting to a Roth. However, you would owe tax on any earnings that accumulated in the traditional IRA. Code H is specifically for direct rollovers from qualified plans to Roth IRAs, not for traditional IRA to Roth IRA conversions. For your situation, code 2 is actually common, but you'll need to file Form 8606 with your tax return to establish your basis (the non-deductible contributions) so you don't get taxed twice.

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I dealt with this exact issue last year! The key thing to understand is the difference between the CONTRIBUTION to your traditional IRA and the CONVERSION to the Roth IRA. If you made non-deductible contributions to your traditional IRA (meaning you didn't take a tax deduction when you put the money in), you should have filed Form 8606 for each year you made those contributions. This form tracks your "basis" in the IRA. When you convert to a Roth, you'll owe taxes on any earnings plus any deductible contributions, but NOT on your non-deductible contributions (your basis). The 1099-R doesn't distinguish between these - that's what Form 8606 is for. So the code 2 is fine - you just need to make sure you file Form 8606 with your taxes to show your basis!

Is this also true for partial conversions? I'm thinking about converting just 50k of my traditional IRA to Roth this year to spread out the tax hit. Will I see this same code 2, and will the Form 8606 still handle the partial non-deductible portion correctly?