Did Schwab screw up my 1099-R?

[cschx]

Sorry for the newbie question; it's my first time messing around with Roth conversions and I'm being thrown for a loop.

I made a $10k conversion from tIRA to Roth, both with Schwab. They sent me two 1099-R forms. Belatedly I'm finding out that these are often filled out incorrectly by custodians, which makes me suspicious given the codes used in box 7 (see below). I exempted myself from federal withholding to avoid the "10% early distribution penalty on tax withholding" gotcha, but the state wanted me to fill out a scary-looking form to do the same. So I went ahead and paid the $425 of state withholding, figuring the worst that could happen was that I'd lose $42.50. Here's what I received from Schwab:

* 1099-R #1 has a gross distribution and taxable amount of $9,575 in boxes 1 and 2a. Box 2b is checked ("taxable amount not determined"). No federal income tax withheld. The code in box 7 is 2 ("Early distribution, no known exception").

* 1099-R #2 has a gross distribution and taxable amount of $425 in boxes 1 and 2a. Box 2b is checked ("taxable amount not determined"). No federal income tax withheld. The code in box 7 is 1 ("Early distribution, exception applies").

Elsewhere I've read that the correct Box 7 code for Roth conversions is G, direct rollover to a qualified plan.

Did Schwab screw this up, and what should I be reporting on my tax return?

[cschx]

Oh yeah, they also sent me a form 5498 ("IRA Contribution Information") with a blank box 1 & 2 and $9,575 in box 3 ("Roth IRA conversion amount").

[cschx]

Schwab rep had this to say:

"Everything is correct for your Conversion of $9575 to the Roth account.
You have 2 1099s, but one of those 1099s is basically offset by the form
5498 you have from your Roth. You will use the 1099 and the 5498
together to document the conversion. You get a 1099 because the
conversion is taxable. The second 1099 shows your premature distribution
of $425."

The problem is that the software I'm using (TaxACT) doesn't support form 5498, but instead suggests using Box 6 of form 8606 to report the "Roth IRA conversion amount" from box 3 of form 5498.

[cschx]

And the thrilling conclusion! TaxACT was filling out form 8606 incorrectly.

Their support people can't tell me how to make it work, so I will probably just use the fillable forms when I file. But if anyone has experience with this particular wrinkle of TaxACT and has a workaround, I'd love to hear about it.

[MDM]

Does TaxAct and Form 8606 - Bogleheads.org (and links therein) help?

[cschx]

Does TaxAct and Form 8606 - Bogleheads.org (and links therein) help?

Yes, thanks - I actually ended up finding that thread yesterday after a bit of forum searching.

This is one of those threads I wish I could just delete... turns out I was simply entering my basis incorrectly (in the context of form 8606, which is new to me, "basis" means something entirely different than what I'm used to).

[cschx]

So although this has been a long and painful learning experience, and although I did get dinged for the "mandatory" $425 of state tax withholding on the Roth conversion, a couple of good things happened:

* I gained several new wrinkles in the ol' cerebral cortex related to Roth conversions and recharacterizations (still lots to learn I'm sure);

* I succeeded in my original goal of using a Roth conversion and planned recharacterization to optimize the saver's credit down to the dollar, essentially getting $4k of Roth for free. (I was inspired by this article from Kitces.)

As someone who's been paying HRB to do my taxes all my life, doing something like this feels like a breakthrough. But since I still don't really know what I'm doing, I am haunted by the thought that there must be an easier way.

[MDM]

...this feels like a breakthrough.

Congratulations!  It does get easier with practice. :)