By J.P. Dahdah, Founder & CEO of Vantage
Tax season isn’t fun for anyone. Especially those with complicated filings. If you file incorrectly or miss a step along the way, it could literally cost you.
Here are a few common scenarios and guidance to help you file taxes for your IRA.
1. You completed an IRA rollover in 2021.
Every year by May 31st, the IRS expects to receive your Form 5498. This form shows the value of your account. A copy is issued by your custodian to both you and the IRS.
If you completed an IRA rollover in the last year, it will be documented on this form. However, you are also responsible for reporting this distribution on Form 1040, U.S. Individual Income Tax Return. You can expect to make a few small calculations, so consult the IRS website for instructions on how to properly fill out your Form 1040.
2. You used money from your IRA to pay your child’s college expenses.
It was a qualified distribution, so why did you receive a 1099-R? Because all distributions, whether early or qualified/required, from your IRA require a 1099-R. This places the responsibility on the IRA owner to prove their eligibility of a penalty exception instead of the financial institution.
To claim the exception, you must also complete Form 5329. Part 1 of the form, Additional Tax on Early Distributions, is where you will list the applicable penalty exception.
Again, refer to the IRS website to ensure you fill this out properly, so you aren’t subject to unnecessary tax penalties.
3. You contributed to a SEP IRA in a different year (2022) then the year the contribution was for (2021). But it’s not showing up on your 5498.
It’s important to note SEP IRA and Simple IRA contributions are reported in the year they are made, not the year for which they are designated.
If your employer made these contributions, you cannot deduct them on your income tax return. But if you or your self-employed partner made them, they may be eligible as deductions. Refer to the instructions on Form 5498 for more details.
And talk to a tax specialist to ensure you correctly filled out all the proper forms.
4. You took a qualified HSA funding distribution from your IRA last year.
When you take HSA funding distributions, they are reported as two transactions. Form 1099-R shows the assets coming out of your IRA, and Form 5498-SA shows the assets going into your HSA.
Additionally, you must also report this on Form 1040. Follow the instructions on the IRS website and talk to a tax professional if you have any questions.
Other Considerations
The cases outlined above are not the only unique situations that can arise when it comes to your IRA and filing your taxes. If your IRA has certain activity in it, there are other tax forms you will need to complete.
Remember: Even though it’s your money inside your retirement account, it’s a completely different entity. Titling of assets are different. And your IRA is taxed differently than you are as an individual.
Take the IRA LLC, for example. When you buy a piece of real estate with an IRA LLC, the warranty deed is going to be in the name of the LLC. Checks will come in and out of the IRA LLC checking account. Which means assets must be titled to the IRA, and money must come in and out of the IRA based on the ownership it has in the assets.
Find someone who specializes in the tax conversation regarding your Self-Directed IRA. Someone who really understands alternative investment strategies and can properly guide you through that process.
Making mistakes with your taxes can be costly. So, if you feel more comfortable seeking out information from multiple professionals, like CPAs and attorneys, work with a team. But whatever you do, make sure you do it right.
Have questions about Self-Directed IRAs? Call our IRA Specialists at 866-459-4580, extension 1133, and they will be happy to answer them.