Understanding Your Taxes: Just What Is Form 5498 And Why Are They Sending It To Me?

Who ever said tax reporting was supposed to be easy? (Jahobr, CC0, via Wikimedia Commons)

Some of our clients have been calling with questions about Form 5498, a tax reporting form they recently received online or 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 Individual Retirement Account in the preceding tax year. For example, if you rolled a 401(k) or another workplace plan over to your IRA in 2020, you should have just received Form 5498 reporting the rollover (typically, it is not taxable but should be reported on your 2020 tax return). Similarly, if you did a Roth conversion in 2020 and moved funds from your Traditional to your Roth IRA, or simply made new Roth IRA contributions, you would have just received a separate Form 5498 reporting that transaction.

What exactly does Form 5498 report? Form 5498 reports contributions or other money going into your IRA accounts so the IRS can track what you put in and what you should take out when it’s time for Required Minimum Distributions (RMDs).

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 or by Fidelity if your retirement accounts are held at either institution). 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. If the information reported does not match what you put on your 2020 tax return, contact your tax preparer promptly.

Why did I get more than one Form 5498? Some people do. You might receive one, for example, for your IRA account if you rolled a 401(k), and another for your Roth IRA if you converted funds or made contributions. Each type of account with a qualifying transaction will receive a 5498.

Why do I receive it so late? 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 (or your tax filing deadline, if delayed like it was the last two years) so as to reflect final contributions to your Traditional or Roth IRA. Brokerage firms are normally given a full six weeks after the income tax filing deadline of April 15 to distribute 5498s to participants. They’re not running late. That’s just the way the system is designed to work. It is up to you to inform your tax preparer of any funds added to your IRAs or Roths before the tax filing deadline, so remember to keep good records.

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 (no pun intended!). 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, 2020 for the 2020 tax year. You report the contribution on your 2020 taxes. But the custodian doesn’t receive your check until January 5, 2021. It will report the contribution – quite correctly – for the 2021 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. 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 truly a mistake? Good question. It’s important to review your Form 5498 totals to catch any errors and request a correction or clarification. That will help you avoid any unnecessary fist fights with the IRS. Mistakes typically occur when a deposit to a retirement account is miscoded as a “contribution” instead of a “rollover.”

Does the form report what I withdrew from my IRA? Unfortunately, no. 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 withdrawals 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 maximum permitted, ask yourself “why”? You could be leaving money on the table. Can you afford to contribute more? Could you benefit from a bigger tax deduction in 2021? Consider bumping up your contribution amount for 2021 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 mid-year reminder to step up your retirement game.

About Mari Adam

Mari Adam, Certified Financial Planner™ 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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