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5 Tax Forms Every IRA Holder Should Know

5 Tax Forms Every IRA Holder Should Know

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Around tax time, many tax payers have questions relating to the tax forms associated with their IRA.  Some who have taken distributions have IRS reporting questions while some just have questions on what to do with the IRS Forms they’ve received. 

Here's a breakdown of the forms you need to be aware of and their purposes.

IRS Form 1099-R

What is it for?

Generally, distributions from retirement plans (IRAs, qualified plans, section 403(b) plans, and governmental section 457(b) plans), insurance contracts, etc., are reported to IRA holders on Form 1099-R.

The IRS Form 1099-R is issued by the custodian of an IRA for any distributions that take place during a calendar tax year. It typically shows the taxable amount of the distribution, amount of income tax withholding, as well as the IRS code that depicts the type of distribution. 

What’s the deadline?

The deadline for custodians to provide this form to the account holder is January 31st of the year following the year of the distribution.

Additional Information:

A taxpayer must file this form with their income tax return only if there has been income tax withheld from the distribution. This amount should be on box 4 of this form.

If an IRA holder didn’t take any distributions, there will be no 1099-R issued.

If you rollover over a distribution to another IRA, your IRA Custodian/Trustee will issue IRS Form 5498, showing the amount that was rolled over. The 5498 will offset the 1099-R.

There is no special reporting code for a Qualified Charitable Distribution (QCD) or for an IRA distribution made to fund a Health Savings Account (HSA).

There is no special reporting for required minimum distributions.

Check out how the IRS Form 1099-R looks like as well as the instructions from the IRS

 

IRS Form 5498

What is it for?

The IRS Form 5498 reports all types of contributions made to an IRA (i.e., annual contributions, rollovers, conversions, recharacterizations).  It also reflects the fair market value of an IRA as of December 31st of the calendar year.

This form is used to tell the IRS which individuals aged 70 ½ or older are required to take a required minimum distribution (RMD). A check box will indicate to the IRS that an RMD is due in the year which the form is being sent to the IRS. 

For Traditional IRAs, the amount of annual contributions made for a year is reported in box 1 of Form 5498 and for Roth IRAs, the amount is reported on box 10. The IRS sets contributions limits for each type of account. Find the contribution limits for this year here. Note that if you or your spouse are covered under another tax-advantaged retirement plan at work, you may not be eligible to take the full contribution deduction.

See a tax advisor or IRS publication 590-A to determine your eligibility. For Roth IRAs, you cannot use your contributions as a tax deduction since the withdrawals you make during retirement aren’t taxable. If your adjusted gross income is below a certain level, you may be eligible for a tax credit which may further reduce your tax liability for the year called the saver’s tax credit.

What’s the deadline?

The form must be sent by the custodian to the IRS by May 31st of the year following the calendar year in which a contribution was made to your IRA.  For example, IRS Form 5498 should be issued by May 31 of this year, for contributions that occurred last year.

Some custodians may choose not to send this form if there are no new contributions to the account.  To do this, there must be language on the Fair Market Value statement sent to the IRA holder by January 31st stating “This information is being reported to the IRS”.  Although the IRA holder may not receive an IRS Form 5498, the IRS will still receive a copy confirming your contribution.

Additional Information:

The copy the IRA holder receives is for their record only. The IRA holder does not use this IRS Form to file their tax return.

For Roth IRA holders, it is important to keep a copy of this form for every year a contribution is made. This form will come in handy in compiling the total contributions that have been made to determine taxation of future distributions.

Be sure to forward this to your tax professional for their records.

IRS Form 8606

What is it for?

IRS Form 8606 is used to keep track of basis in your IRA. Basis is attributed to non-deductible IRA contributions to Traditional IRAs and rollover of after-tax amounts from a previous employer’s retirement plan.  After-tax contribution in an employer plan are employee contributions made on an after-tax basis.  These after-tax contributions are different from designated Roth contributions.

Contributions to a Traditional IRA may be deductible but in certain cases, if you are participating in an employer plan, the benefit of using your Traditional IRA contribution as a deduction may depend on the level of your income.

These limits are based on your modified adjusted gross income (MAGI). Any amount you contribute to a Traditional IRA that you do not deduct on your tax return is a called “nondeductible contribution.” You must report these contributions on IRS Form 8606 to make sure all your savings are not subject to federal income tax twice.

What the IRS Form 8606 does is record that a portion of the money in your IRA has already been taxed. Later on, when you take distributions, a portion of the money you get back will not be subject to income tax if tracked using this form.

Part II of the form is used to track Roth IRA conversions since the amount converted during the year will be considered basis or after-tax dollars.  The form is also used to track the 5-year period to determine whether the distribution of a Roth IRA conversion amount is penalty free. 

Lastly, if a Roth IRA holder is taking a distribution in which the Qualified Distribution criteria has not been satisfied, the form assists the IRA holder through the ordering rules.  Roth ordering rules mean that Roth IRA contributions are deemed to be distributed first (i.e., total contribution reported on IRS Form 5498), then conversion dollars and lastly earnings. 

The custodian does not send this form the IRA holder. It is the responsibility of the IRA holder to file it to the IRS.

What's the deadline?

The IRA holder should file IRS Form 8606 with their tax return by the tax deadline, including extensions. However, if your tax return has already been filed, it can be filed separately.   There may be a penalty of $50.00 if the IRS form 8606 is not filed.

Additional Information:

This form is completed and filed by you the IRA holder on your tax return.

A separate form should be filed for each tax year that non-deductible contributions are made.

Failure to file IRS Form 8606 could result in you owing income tax on amounts which should be tax-free.

Check out the IRS Form 8606 here.

 

IRS Form 990-T

What is it for?

The IRS Form 990-T must be filed by the IRA holder for incomes received that are derived from a Trade or Business. Since incomes from a business received by an IRA was not intended to be tax-exempt, this income must be reported to the IRS and will be subject to a tax if it has $1,000 or more in taxable income. The tax imposed will be based on trust tax rates since IRAs are considered trusts. Passive incomes such as interest, dividends, rents and royalties are not subject to UBTI.

What’s the deadline?

The deadline for the IRA holder to file this IRS Form 990-T, if necessary, is April 15.  You can file for a 6-month extension using the IRS Form 8868 if you need more time to prepare the IRS Form 990-T.

Additional Information:

A schedule M attachment must be included separately for every investment declaring taxable Unrelated Business Taxable Income (UBTI).

An EIN must be acquired by the IRA holder for the IRA that needs to file the IRS Form 990-T.

Taxes must be paid from IRA funds and cannot be paid out of pocket.

Learn more about UBIT here.

 

IRS Form 1040 

What is it for?

Form 1040 is the standard IRS Form that taxpayers use to file their annual income tax returns. The form contains sections that require taxpayers to disclose their taxable income for the year in order to determine whether additional taxes are owed or whether the filer is due a tax refund.

Everyone who earns income over a certain threshold must file an income tax return with the IRS. 

But what does it have to do with your IRA? If an individual has taken a distribution from their IRA, the amount is reported on line 4a of the schedule 1 attachment to the IRS Form 1040. The taxable portion of the distribution is reported on line 4b of the form. If any amount is rolled over, the instructions will state to include “Rollover” beside line 4b. An IRS Form should offset the 1099-R to eliminate the taxation of any amounts reported as rolled over.

If an individual has made a deductible IRA contribution, the amount should be reported on line 32 of the Schedule 1 attachment to the IRS Form 1040.  For SEP, SIMPLE or Qualified plan contributions by a self-employed individual, the amount is reported on line 28. 

What’s the deadline?

Taxpayers should file their IRS Form 1040 by the tax return deadline due date of April 15.

Additional Information:

  • Check out IRS Form 1040 here

 

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