Form 5498 is the best way to find out what you’re paying in taxes and if there are any deductions that can be taken. Here’s all of the essential information on this form including how to prepare it, when do I need it, who needs one and more.
Form 5498 is a form that must be submitted to the IRS by taxpayers. This form contains information about taxes and credits that were applied to your tax return. The instructions for Form 5498 can be found on the IRS website.
If you have an IRA (individual retirement arrangement), you should be aware of an IRS tax form. Form 5498—IRA Contribution Information is what it’s called.
In a nutshell, Form 5498 details any money deposited into an IRA over the preceding year. Your broker or the financial institution in charge of your IRA issues it.
This post will explain Form 5498 so that you may comprehend it better. More significantly, we’ll go through a critical tax planning option that you can learn about by filling out this form.
What exactly is Form 5498?
Form 5498 is an IRA contribution information form, according to the IRS website. Its purpose is to “report contributions, including any catch-up contributions, required minimum distributions (RMDs), and the account’s fair market value (FMV).”
Let’s take a closer look at this.
The IRA’s kind
Form 5498 is used to report significant transactions in any The IRA’s kind. This includes:
- Traditional Individual Retirement Accounts
- IRA Roths
- PLAIN IRAS
- SEP IRAs
- IRAs inherited
Contributions to an Individual Retirement Account
Any money or assets moved into an IRA must be reported on Form 5498. This comprises:
- Participation (both deductible and nondeductible)
- contributions made late
- Transfers to an IRA
- Recharacterizations. This involves converting Roth contributions to regular IRAs when the taxpayer’s income and contribution restrictions were exceeded.
Information about RMD
Additional information is included on Form 5498 that is utilized to compute RMDs. This comprises:
- RMD Date
- Account Balance at Year’s End
Finally, the Form 5498 includes areas for additional IRA-related information. This might contain items such as:
- Unliquid assets, such as real estate or tightly held shares, have an estimated fair market value.
- Late contribution regulations include eligible catastrophe locations and service in qualified fighting zones.
- Returning a qualifying reserve distribution
Form 5498 Variations
IRA transactions are reported using Form 5498. Other variants of the form, on the other hand, are used to record comparable transactions in tax-advantaged accounts. Among them are:
- Contributions to a qualified ABLE (Achieving a Better Life Experience) account are reported on Form 5498-QA. ABLE accounts are tax-advantaged savings accounts for persons with disabilities who meet certain criteria.
- Contributions to a Coverdell Education Savings Account are reported on Form 5498-ESA (ESA)
- Contributions to one of the following are reported on Form 5498-SA:
- Accounts for Health Savings (HSA)
- Medical Savings Accounts from Archer (MSA)
- MSA (Medicare Supplement Insurance)
The financial institution in charge of the IRA issues Form 5498 for informative reasons. However, Form 5498 is unlikely to provide a significant advantage to the taxpayer.
Who gets Form 5498?
Each copy of Form 5498 is supplied in three copies. They each go to separate parties and include similar information:
Copy A: The Internal Revenue Service receives Copy A.
Copy B is sent to the taxpayer. This is the document that you should anticipate from your IRA trustee or custodian.
Copy C: The IRA custodian retains Copy C.
How to Fill Out Form 5498
The information on Form 5498 is extensive. Let’s take a look at the form and go through each part one by one.
The IRS Form 5498 looks like this.
Basic information like as name, address, and TIN may be found on the left. The term TIN refers to a taxpayer identification number. It is the same as your Social Security Number for people.
Boxes 1-15 are on the right. We’ll go through them in sequence since they contain the majority of the crucial information.
Box 1-IRA contributions: Total IRA contributions for the tax year are shown in this box. The sums in boxes 2-4, 8-10, 13a, and 14a are not included. It also doesn’t say whether or not you may deduct these payments from your taxes.
Box 2: Rollover contributions: This box displays the amount of money transferred from another tax-advantaged account. Examples include:
- IRA Rollovers for 60 days
- Direct or indirect Rollovers from qualifying retirement plans such as a 401k or 403b
- Rollovers into a Roth IRA that are qualified (but not Roth IRA contributions, which are reported in Box 3)
- Gratuity for military deaths
- Proceeds from Servicemembers’ Group Life Insurance (SGLI)
Box 3: Amount transferred to a Roth IRA: Displays the amount converted to a Roth IRA. This money might come from a standard IRA, a SEP IRA, or a SIMPLE IRA.
Box 4: Recharacterized contributions: The sum of recharacterized contributions (plus accrued profits) from a separate account.
Box 5: Account FMV (fair market value): This is the account balance as of the tax year’s end on December 31. RMDs cannot be calculated without this information.
Box 6: Life insurance cost: In the event of endowment contracts, this box is used to reflect the cost of life insurance.
Box 7: IRA Type: Indicates if the IRA is a regular, SEP, SIMPLE, or Roth IRA.
Employer contributions to a SEP IRA for the tax year reported are included in Box 8.
- Employee contributions, which are stated in Box 1, are not included.
- Contributions from a self-employed person are included.
- Contributions from the preceding tax year are included in the reporting tax year. A 2022 Form 5498, for example, would cover donations made in calendar year 2021. However, donations made in 2022 would not be included. Because these donations are for the previous tax year, they will be reported in 2023.
Box 9: SIMPLE contributions: Includes contributions to the plan from the employer. Contributions made in the prior tax year are also included in the reported tax year.
Box 10: Roth IRA contributions: Total Roth IRA contributions made for the tax year through the tax filing date are included in this box. Roth IRA contributions are not included.
If this box is ticked, you must take RMD for the next tax year. For example, if Box 11 on Form 5498 for 2022 is ticked, the taxpayer must take an RMD in 2023.
RMD is divided into two blocks: date and amount. The IRA trustee will record the RMD date in Box 12a and the RMD amount in Box 12b if applicable.
Box 13: Contribution that was postponed. Usually empty. Dollar amount, year, and reason code are the three blocks. The IRA trustee will record the amount of the postponed contribution in Box 13a, the year in Box 13b, and the explanation code in Box 13c if applicable. Codes for reasons include:
- Service in a qualifying conflict zone on active duty
- ‘Affected taxpayers,’ according to an IRS press release on federally declared disaster areas
- Amount offset by qualifying plan Rollovers
- Late contributions owing to conditions specified in Rev. Proc. 2020-46 Section 3.02(2)
Repayments (Box 14). There are two blocks: the dollar amount and the reason code. The IRA trustee will submit the payback amount in Box 14a and the reason code in Box 14b if it is needed. Codes for reasons include:
- Distribution of qualified reservists
- Disaster relief distribution by qualified professionals
- Distribution of qualified birth or adoption
FMV: Fair market value of some assets (Box 15). There are two blocks: the dollar amount and the reason code. The IRA trustee will record the FMV amount in Box 15a and the reason code in Box 15b if it is needed. Illiquid assets, such as real estate, tightly held corporate shares, or partnership interests, are examples of reason codes. The IRS Instructions for Forms 1099 and 5498 give a complete set of reason codes.
Filing Requirements for Form 5498
This is not a form that must be included with your tax return. In reality, many Form 5498s are issued beyond the year’s tax deadline.
The IRS deadline for Form 5498, according to IRS Publication 1220, is May 31 of the following year. The due date for tax year 2021, for example, is May 31, 2022.
Taxpayer notification, on the other hand, has various criteria. This comprises:
- 31st of January: FMV/RMD
- Form 5498-ESA due on April 30.
If the due date occurs on a weekend or federal holiday, the document must be submitted the following working day to be deemed timely.
Let’s take a look at the hidden tax opportunity.
Roth IRA contributions: A Forgotten Tax Planning Opportunity
As previously stated, the financial institution in charge of your IRA issues Form 5498. It’s given out for every year when money or securities were transferred into the account. This may include (but is not limited to) the following:
- Contributions to IRAs (including SEP, SIMPLE, or Roth IRA contributions)
- Roth IRA contributions
For each account, an account holder will get a Form 5498. So, if you make a non-deductible conventional IRA contribution and then execute a backdoor Roth conversion, you’ll get a Form 5498 for both your regular and Roth IRAs.
Additionally, because money left your conventional IRA, you would get a Form 1099-R.
What exactly does this imply?
It probably doesn’t signify anything to most people. This is merely a record of how much money you put into your IRA in a particular year.
This form won’t matter much to IRA owners who are able to donate directly to a Roth IRA or completely deduct conventional IRA contributions on their tax return.
However, there is a situation where this will come in handy. That is when your traditional IRA ends up having a combination of deductible (pre-tax) & non-deductible (after-tax) contributions.
Here are two circumstances where this may happen:
Scenario 1: You start off in a lower tax bracket at the start of your career. While contributing to your company retirement plan, you contribute directly to a typical IRA. You’ll be able to optimize your retirement funds this way.
You gradually approach the income phase out restrictions for deducting your IRA contributions on your tax return. Pre-tax and after-tax contributions are now combined in your IRA.
Scenario 2: You’ve been contributing to a non-deductible IRA for a while. However, you did not convert them to a Roth IRA. You switch jobs.
As part of this change, you change your 401k participation. To simplify your finances, you rollover your previous 401k into your traditional IRA. You now have a combination of pre-tax contributions & after-tax contributions.
How can I tell which donations were tax-deductible and which were not?
To maintain track of your after-tax contributions, you should utilize Form 8606-Nondeductible IRAs. However, many individuals fail to submit Form 8606 every year. Or at all.
This occurs for a variety of reasons:
- They have no idea what they’re meant to do.
- They keep their IRA contribution a secret from their accountant.
- Their tax software does not adequately urge them to do so.
Fortunately, you can calculate this out by combining your Form 5498 with each year’s tax returns.
To do so, compare Block 1 (IRA contributions other than those in boxes 2-4, 8-10, 13a, and 14a) to your tax return’s ‘IRA deduction’ line.
This line item may be found in the following years:
- 2021: Line 20 of Schedule 1
- 2019 & 2020: Schedule 1, Line 19
- Schedule 1, Line 32, 2018
- 2017 & prior year returns: 1040, Line 32
There will be one of three outcomes:
- The value in Block 1 is the same as the value on your tax return. This signifies that your IRA contribution was completely deductible for the year and is a pre-tax contribution.
- The IRA deduction does not have a number on your tax return, but it does have a number in Block 1 of your 5498. Your IRA contribution was not deducted at all that year, therefore it is considered an after-tax contribution.
- Both types have numbers, but they are different. Your IRA contribution was only partly deducted in that year. The amount of your after-tax contributions is the difference between the two values.
This normally occurs when your IRA contribution deduction eligibility is about to expire.
A single tax filer (participating in an employer-sponsored retirement plan) might, for example, in 2021:
- If their modified adjusted gross income (AGI) is less than $66,000, they may fully deduct their IRA contribution.
- If their adjusted AGI was $76,000 or above, they couldn’t deduct their IRA contribution at all, or
- If their adjusted AGI was between $66,000 and $76,000, they might deduct a portion of their IRA contribution. This is referred to as a phase-out.
This amount must be calculated for each year that you contributed to an IRA. The amount represents the sum of your donations after taxes.
What is the potential for tax planning?
If you are doing Roth IRA contributions, you might be able to do so without paying federal income taxes on your after-tax IRA contributions.
In fact, if you keep track of how much your pre-tax contributions actually were, your tax professional can account for this in your tax returns. That will keep your tax bill low as you do those Roth IRA contributions.
You may even be able to convert solely the after-tax donations while retaining your pre-tax payments in a pre-tax account in certain circumstances.
You can avoid paying taxes on any pre-tax donations if you convert solely the after-tax contributions. This would need significant tax guidance, which is beyond the scope of this paper.
What matters is that you understand how much of your IRA was funded by pre-tax contributions. This will enable you to devise a Roth conversion plan.
Is Form 5498 required by my accountant?
Almost certainly not. Form 5498 is a non-required informational form for filing a tax return.
If you do Roth IRA contributions, you may need your Form 5498s, as well as your old tax returns. That will help your your tax preparer properly calculate your tax liability.
The fact that you have this paperwork is even more significant in case you are audited. When you have all of the data, talking with an auditor is substantially different than when you ‘think’ you know the figures. You may avoid tap-dancing in front of the examiner if you have your Form 5498s and tax returns.
What you must do before you begin converting
Before you begin converting, the most crucial thing you should do is discuss your approach with your accountant. You want to accomplish three things:
- Your accountant is aware of your plan and supports it. They’ll be telling the narrative after the event by drafting your tax return. So, before going ahead, make sure they’re on board with the overall idea. If not, it’s worth spending the time to figure out what changes you need to make to get them on board.
- As part of your tax preparation, you examined that year’s plan. This is a unique situation.
- The mechanics are second nature to you. This implies that if you need to create a Roth IRA, you should actually do it. Your accountant will most likely be able to advise you on what you should do, but they may not be in charge of the actual transactions. You or your financial adviser are responsible for this (if you have one). If you deal with an investment adviser, your accountant and investment advisor should agree on what has to be done and when.
What if I’m unable to locate my Form 5498s?
Make an appointment with your financial institution or a financial counselor. You should be able to get copies for each year that you contributed to an IRA that they administer. This is the recommended method.
This may be challenging if you’ve switched custodians or have a long history of IRA contributions. You should be able to prove when deposited money reached your IRA if you retain paper (or electronic) copies of your statements.
Although this is not the best method, it may help you to explain the history of deposits to your examiner.
In any scenario, you should talk to your accountant or tax counselor about what paperwork you have so they can determine how to proceed.
The tax returns for each year are more crucial. They have information on how much of your donations were deducted (pre-tax) and how much was not deducted (after-tax).
If you’re planning a Roth conversion, you should pay special attention to IRS Form 5498, which is a year-end statement.
It’s critical to account for any after-tax contributions you’ve made to your IRA throughout the years as you execute your Roth conversion approach. If you don’t do this, you’re essentially throwing money away that might be used to support you in retirement.
Form 5498 is a form that the IRS requires for people who have made certain contributions to an IRA. The form is issued by banks and other financial institutions when you make these contributions. Reference: when is form 5498 issued.
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