Tax form 5498— you know it, you probably don’t love it, but do you understand it? The Internal Revenue Service (IRS) seems to use it, but it’s an unclear form full of codes and terms the average investor doesn’t know. Want to know more about this form, what you need to do with it, and how it’s used? Let us ease all your concerns and answer your questions, below.
What is Tax Form 5498?
A 5498 is a tax form that IRAR Trust files with the IRS on May 31st but for the tax year 2020, this was extended to June 30th, 2021. It identifies different transactions that can happen within an IRA, like a contribution, a rollover, or a required minimum distribution(RMD). The IRS uses this information to verify what was reported on your tax return.
This form verifies direct and indirect rollover amounts to make sure the money that came out of your self-directed IRA went back into an appropriate type of IRA or retirement plan. For example, you can't rollover a Roth IRA into a Traditional IRA, SEP IRA, or SIMPLE IRA. It must go into a Roth IRA.
Here's How It Works
When completing a rollover, the initial distribution is processed (when funds are released from your previous custodian) and the IRS receives form 1099-R. This lets them know the cash value of the distribution.
The IRS then uses form 5498 from your current custodian and matches it to that amount, indicating that a “taxable” event didn’t happen, since the full amount of the distribution was received by another qualified retirement account. In other words, you took the retirement savings account and put it back— so, this transaction is tax-free.
The IRS also uses form 5498 reports to determine the value of required minimum distributions. They use a Uniform Lifetime Table to determine the amount using an algorithm based on your age (the age of the account holder, not the age of the IRA itself) and the fair market value of your account. If you want to know more about required minimum distributions, we have more information available on our blog.
When Should I Expect to Get Form 5498?
In 2021 due to the pandemic, the tax deadline of April 15 was extended. IRAR Trust is required to send this form to the IRS by June 30, 2021 to be compliant with IRS regulations. You’ll receive a 5498 if you’ve made a contribution between the dates of January 1st and May 17th following the tax year for which the contributions relate.
For example, if you contributed for 2020 any time from January 2021 up until the tax deadline, you’ll receive a form 5498 for IRA contributions. Any contributions made earlier or in 2020 will be detailed on your year-end statement from January until, December 31.
You won’t receive a 5498 before the tax filing date— this is by design, allowing for previous-year contributions to be accepted up to the tax filing deadline of April 15th (Extended to May 17th for tax-year 2020).
What Do I Need to Do with Form 5498?
If you have received a 5498, please confirm that the amounts listed on the form and the total value of the account are reported correctly. Additionally, if you completed a rollover for the previous year, please make sure that the expected distribution amount on your 1099R (mailed by January 31st) matches the rollover contribution amount listed in “Box 2” of the 5498.
The IRS will use the fair market value reported on the 5498 to calculate the required minimum distribution amounts for individuals over the age of 72. Make sure to take the full distribution amount— failing to do so will result in a penalty of 50% of the RMD amount that was not taken.
Tax paperwork is never fun, but tax form 5498 is nothing to worry about— you just need to make sure it accurately reflects your account activity for the previous year. It’s important to verify the information is correct— an incorrect account value or an improperly reported transaction can result in a higher tax burden or a larger RMD.
See, it's not too complicated. If you still have questions, get tax advice for your individual retirement strategy from a tax expert.
If you’re an IRAR client, we’d love to assist. Please contact an IRAR Trust representative and someone will help in any way possible.