Understanding Your Taxes: Just What Is Form 5498 And What Am I Supposed To Do With It?

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If you think that our tax reporting system bears a close resemblance to a wacky Rube Goldberg-inspired design, you might just be right!

Some of our clients have been calling with questions about Form 5498, a tax reporting form they recently received in the mail.

If you’re the kind of person who likes to understand how things work, or are curious as to why you’re receiving this form long after the tax deadline, here’s the inside scoop:

Does everyone receive a Form 5498? No. You should expect to receive IRS Form 5498 only if you made contributions or rolled funds into a Traditional, Roth, SEP or SIMPLE IRA (Individual Retirement Account) in the preceding tax year.

What exactly does Form 5498 report? Form 5498 reports contributions, Required Minimum Distributions (RMDs), and the fair market value (FMV) of your IRA account so the IRS can track what you put in and what you should take out.

Who sends the form, and what am I supposed to do with it? Form 5498 is an informational return sent by your IRA account custodian to the IRS (for example, by Charles Schwab if your retirement accounts are held at Schwab). You receive a courtesy copy. You don’t need to file the form with your taxes or do anything with it, although it does contain important information that you should review carefully for accuracy.

Why did I get more than one Form 5498? Some people do. You might receive one, for example, for your IRA account, and another for your SIMPLE IRA account, if you added money to both. Each type of account with a qualifying transaction will receive a 5498.

Why does it not come out until May? This is the most common question/complaint we hear, but there’s actually a simple explanation. The form can’t be generated until after April 15, since you have until April 15 – your tax filing deadline – to finalize contributions to your Traditional or Roth IRA.

Turbo Tax explains that brokerage firms “have until May 31 to distribute 5498s to participants — a full six weeks after the income tax filing deadline of April 15.” They’re not running late. That’s the way the system is designed to work. (See cartoon above for clarification).

Why does the amount reported on Form 5498 as my SIMPLE or SEP contribution not match the amount I actually put in? There’s a simple explanation for this, too. The IRS requires your custodian to report your contributions as of the day they received them. This may not match your own records. For example, you may have contributed $5,000 to your SIMPLE account on December 28, 2014 for the 2014 tax year. You report the contribution on your 2014 taxes. But the custodian doesn’t receive your check until January 5, 2015. It reports the contribution – quite correctly – for the 2015 tax year, creating a mismatch between your records and what’s reported to the IRS. Don’t worry – it seems wacky but those are the rules. (Need guidance? Refer to the cartoon above).

Be aware, as well, that Form 5498 reports total contributions to your SIMPLE IRA account, whether stemming from employee or employer contributions.

What if there is a mistake? Good question. Each year, we review the 5498 copies we receive for clients exactly for that reason. Every year, there are a few mistakes that we ask to have corrected so our clients don’t get into unnecessary fist fights with the IRS. Mistakes typically occur when a deposit to your retirement account is miscoded as a “contribution” instead of a “rollover.”

Does the form report what I withdrew from my IRA? No, that would make life too easy. Just kidding. Withdrawals are reported on another form, called Form 1099-R. That form normally needs to be provided to you by January 31 so you can report the withdrawal information on your tax return.

Takeaway Tax Tip: If you received a 5498, take a good look at it. If your contributions were less than the max permitted, ask yourself “why”? Can you afford to contribute more? Could you benefit from a bigger tax deduction in 2015? Consider bumping up your contribution amount for 2015 to get more money into your retirement accounts and slash your tax bill. We see far too many people who could contribute more but don’t … until it’s too late. So consider your 5498 as a timely half-year reminder to take your retirement game up to the next level.

 

About Mari Adam

Mari Adam, Certified Financial Planner™ and President of Adam Financial Associates Inc, has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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