Form 5498 & How IRA Contributions Impact Taxes

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If you want to pave the way for a safe and secure future, it’s imperative that you make sound financial decisions today. In particular, you should begin building up retirement savings accounts. In addition to giving you a nest egg to retire on, these accounts also provide tax advantages and perks. Do you know what they are?

How Do IRA Contributions Impact Taxes?

There are a variety of retirement plans to choose from. For employees of large companies, the 401(k) is often the preferred plan. But for those who don’t qualify for a 401(k), or for those who would prefer greater autonomy, the IRA is a fantastic option.

Currently, taxpayers are allowed to contribute up to $6,000 per year to an IRA ($7,000 if you’re 50 or older). This applies to each individual, regardless of marital or tax filing status. This means a married couple can contribute up to $12,000 per year to IRAs (assuming each individual has their own separate account).

There are two common types of IRAs:

  • Traditional IRA.
  • With a traditional IRA, you receive a tax deduction in the contribution year. You then pay taxes on withdrawals according to your tax bracket at the time when you pull the money out. Anyone with earned income is allowed to contribute to a traditional IRA, though tax deductibility depends on certain income limits and thresholds.
  • Roth IRA.
  • With a Roth IRA, there’s no income tax deduction up front. All contributions are considered after-tax contributions. The benefit with this type of plan is that you’re able to withdraw funds tax-free. Single tax filers with modified adjusted gross income (MAGI) of less than $139,000 – and couples with less than $206,000 MAGI – can contribute.

As you probably noticed, the biggest difference between a traditional IRA and a Roth IRA is the fact that one allows you to take an income tax deduction in the year you contribute, while the other provides tax-free withdrawals. To understand this better, let’s look at an example:

Let’s say you contributed the maximum amount ($6,000) to a traditional IRA in 2019. If your effective tax rate is 28 percent, your income tax deduction for 2019 will be $1,680. However, upon making a qualified withdrawal (after the age of 59 1/2), you’ll be required to pay taxes on what you pull out. The opposite is true for a Roth IRA. Though you get no tax benefit on the front end, you don’t have to pay any taxes on the back end.

Many people prefer traditional IRAs because of the upfront tax advantages. However, if you anticipate having a higher tax bracket later in life, the Roth is arguably the superior option. It all depends on your situation and how you want to handle your finances.

It’s possible to have both a traditional IRA and a Roth IRA; however, you can only contribute a grand total of $6,000 to these accounts per year. If you want to split it down the middle – $3,000 to each account – that’s completely fine.

Contribution Requirements and Limitations

For the most part, IRAs are pretty straightforward. But there are a few requirements and limitations to be aware of:

  • You can make regular contributions to IRAs up until the age of 70 ½, provided you have some earned income.
  • Earned income includes any wages reported on a W-2, self-employment income, bonuses, commissions, alimony, and nontaxable combat pay. You can’t count profits and earnings from property, pension or annuity income, interest and dividend income, or deferred compensation as earned income.
  • Funds can be contributed to an IRA at any point during the calendar year. You’re also allowed to make contributions up until you file your tax return and backdate them to the previous tax year (assuming you don’t take any extensions.)

Not sure if you qualify and/or which restrictions are in play for your situation? You can learn more by speaking with the institution that manages your IRA, a certified financial planner, or a CPA.

What is IRS Form 5498?

When you save for retirement with an IRA, you’ll receive a Form 5498. The institution responsible for managing your IRA is required to report all contributions made during the tax year on the form.

You can think of Form 5498 as an official notice – to both you and the IRS – of how much you’ve contributed during the year. You’ll receive a separate form for each account you have – including traditional IRAs, Roth IRAs, and even Health Savings Accounts (HSAs). You should receive these forms via mail, but many institutions now make them available online.

There are three different kinds of Forms 5498:

  • Form 5498.
  • This is the standard form. It reports contributions to individual retirement accounts like traditional IRAs, Roth IRAs, SIMPLE IRAs, and SEP IRAs.
  • Form 5498-SA.
  • This form is used to report information about HSAs – including any contributions for the tax year.
  • Form 5498-ESA.
  • This form reports information about Coverdall Education Savings Accounts – including any contributions for the tax year.

The IRS requires Form 5498 to be mailed out no later than January 31 to IRA account holders. It’s required to be filed with the IRS by May 31 (at the latest).

As you review your Form 5498, you’ll notice that traditional IRA contributions are reported in Box 1. All deductible contributions are reported on Form 1040 (line 32). If you have nondeductible traditional IRA contributions, they’ll be denoted on Form 8606 (line 1).

Even though Roth IRA contributions aren’t reported on your tax return, you should still save your Form 5498 for your own personal records. Box 10 shows your total contributions for the previous tax year.

If you made any rollover contributions during the tax year, you’ll see this amount in Box 2 of Form 5498. (You can verify that this number matches up with the Forms 1099-R you received from the rollover institution.)

If you’ve made a Roth IRA conversion during the tax year, this amount will be reflected in Box 4 of Form 5498. Again, you can cross-reference this number against Forms 1099-R to verify that it’s correct.

For HSA contributions, you’ll find the amount in Box 2 of Form 5498-SA.

What to Do With Your Form 5498

Form 5498 is purely for your own information and records. If you made contributions that impact your taxes, this information will be filled in on your return. If you made contributions to an account that doesn’t qualify for immediate tax deductions – like a Roth IRA – you can simply file this form away.

A common misconception is that taxpayers have to send their Forms 5498 into the IRS. However, your IRA trustee or issuer is actually the one who is responsible. They will file this form with the IRS by May 31 at the latest. Your form is simply a copy for your own records.

Upon receiving your Form 5498, be sure to scrutinize the numbers and compare them against your own personal files and records. A mistake on one of these forms could cost you money. It’s also possible that it could lead to an unnecessary IRS audit. Reviewing it sooner, rather than later, will give you ample time to correct any mistakes.

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