TurboTax presently has a bug where it is treating an indirect Roth conversion as subject to penalty.
If no taxes were withheld from the code 1 distribution, you can work around the problem by selecting code 2 on TurboTax's 1099-R form instead of code 1. Because there were no taxes withheld, the details of what you selected are not transmitted to the IRS. (If taxes were withheld, I can provide alternative workarounds, but they will involve paper filing by mail.)
I would not wait for a fix to be provided by TurboTax; TurboTax Product Quality has so far not acknowledged the existence of this serious bug.
