My wife made a contribution with post-tax funds (no deduction taken) to a new Traditional IRA in early 2019. We then asked our custodian to recharacterize that contribution as to being into a Roth IRA. Rather than recharacterize, they did a full account conversion.
On her 2019 1099-R for the Traditional IRA, Box 7 has a distribution code of 2. I believe that this is an error and should instead (maybe) be code N? Code 2 conveys that it is a Roth conversion of pre-existing funds (where a deduction was taken in a prior year) and that they are taxable. Code N conveys that it was a same-year recharacterization which it was intended to be. When toggling this value from Code 2 to Code N, I see a substantial decrease in our TurboTax federal tax due which is what I would expect.
The 2019 contribution originally to the Traditional IRA was with already taxed dollars and we have not taken a deduction against them.
The custodian's response was:
To summarize what happened, we submitted a conversion instead of a recharacterization in 2019. When performing a conversion, this is an irreversible action as of October of 2018.
Am I understanding this correctly? If this is an error, how do we address this on our tax return if we are not able to receive a revised 1099-R? What should the code be for a same-year conversion?
Thanks.
