Ep. 266 – Form 5498 Demystified – Essential Tax Information for Retirement
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In this Episode of the Secure Your Retirement Podcast, Radon, Murs, and Taylor discuss the significance of Form 5498 as an essential tax information document. Taylor describes Form 5498 as an informational document that reports contributions, rollovers, and required minimum distributions (RMDs) related to IRAs.
Listen in to learn why Form 5498 is important for record-keeping and verification purposes but does not impact the already filed tax return. You will also learn why the form shouldn’t cause alarm since it doesn’t necessitate any changes to the already filed tax returns.
In this episode, find out:
- The informational purpose of Form 5498 is to verify contributions to and rollovers between retirement accounts.
- The information reported on Form 5498 includes contributions to IRAs, rollovers, and RMDs.
- The difference between the taxable distributions reported on Form 1099 and the informational nature of Form 5498.
- Why Form 5498 does not require any changes to already filed tax returns.
- How Form 5498 helps the IRS verify that contributions reported on tax returns were actually made.
- A practical example of a 401k rollover and how it’s reported using Form 5498.
- Why Form 5498 comes out later in the tax year as opposed to other tax return forms.
Tweetable Quotes:
- “Form 5498 is for your records in case you were ever to be audited or need to prove to the IRS that you did something this way or that way.”– Murs Tariq.
- “The 5498 reports contributions to accounts, or sometimes custodians will send out 5498s to show what the required minimum distribution should have been for the prior year.”– Taylor Wolverton.
Resources:
If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!
To access the course, simply visit POMWealth.net/podcast.
Here’s the full transcript:
Radon Stancil:
Welcome to Secure Your Retirement podcast. Today we are excited because we have a special guest with us, Taylor Wolverton, who is our tax guru, in-house Tax Guru, and we have her come on from time to time to talk about things that are in the tax world. And today we’re going to talk about form 5498. Now, you might not have heard of this form, or you might’ve heard of this form. Regardless, we want to go through it and we’re going to walk you through why you might need to know about it. So Murs, what prompted us to be able to have Taylor on for this?
Murs Tariq:
Yeah, so just a few days ago we had a client that emailed over and he actually forwarded over an email that he got directly from Schwab, which is where some of his assets are. And the email said, “Important tax information, important tax document,” which is always a way to get you to open up that email and it says your form 5498 is now available. And so his email to us, including that forward, basically said, “What do I need to do with this? I’ve already filed my taxes, so did I miss something here?” So it was more of an alarming email to him just because he didn’t really know what he was looking at. And I’m sure a lot of you do not know what a form 5498 is, what it’s purpose is, and what you need to actually do with it.
So that’s why we’re having this episode to kind of walk through it. One is, it’s timely. It’s coming out right around now or you may have received in the last couple of weeks. So we want to make sure you understand what you’re looking at. So Taylor, in that email, what was your response to the client that he emailed over worried about this document that he may have missed for his taxes?
Taylor Wolverton:
Yeah, my response was something like, you don’t need to stress out about it. It’s just for information for you and the IRS to show that that client in particular had a transfer their 401k from that custodian to a traditional IRA at Schwab. So that’s why Schwab was issuing that form to them just to confirm that that 401k rollover had happened in 2023, and that’s really what the form was just saying. So they just needed to keep it for their information. It did not change anything about how their 2023 tax return was filed and submitted. So it’s just something to keep for your records, but it doesn’t change anything that’s already been done with your tax return.
Murs Tariq:
Yeah, so if you take one thing away from this entire episode, the big story is it’s for your records. In case you were ever to be audited or if you are ever to need to prove something to the IRS that you did something this way or that way, it’s really a document for yourself. So Taylor, help us understand what is reported on the form 5498. Why is it important?
Taylor Wolverton:
Yeah, so if you get that email from your custodian and you open it, open the form, what you’ll probably see is some information about your contribution to your traditional IRA, maybe a Roth IRA or a simple IRA. So if that was something that you put money into last year, you’ll get that form reporting that the contribution was received. There are also rollover. Rollovers will be reported on 5498. So like this client that had emailed us about it, they had taken their 401k and moved it into an IRA. So that form will also show that that rollover was processed in 2023 as well.
And then sometimes 5498 will also report what your required minimum distributions are, if that is applicable to your situation. And it will show what the fair market value of your IRA was last year, on the last December 31st, 2023, and what your required minimum distribution should have been. Or I’m sorry, from the year prior. So December 31st, 2022, and what year 2023 required minimum distribution should have been. So it’s a way for those types of transactions to show what should have been reported on your tax return for those contributions and RMDs.
Radon Stancil:
Excellent. So ultimately it’s kind of like just a form reporting information.
Taylor Wolverton:
Yeah, exactly.
Radon Stancil:
Okay, so let’s talk about that then for a second, because let’s say a 1099, it also reports information in all essence, but what’s the difference between a 1099 that we would get and a 5498?
Taylor Wolverton:
Yes. So a 1099 will report a distribution or a source of income. Usually, that is taxable, that will be reported on your tax return. That’s the form that you need before you file your tax return for the year, because that information from a 1099 does need to go on your tax return. The 5498 reports contributions to accounts, or like I said, sometimes custodians will send out 5498s to show what the required minimum distribution should have been for the prior year. So 1099 distributions, 5498 contributions.
Murs Tariq:
Okay, very good. And does the form 5498, does it help reduce taxable income?
Taylor Wolverton:
It depends on what the form is reporting. If you contributed to a traditional IRA for the tax year 2023 for example, let’s say, then that type of contribution should have already been reported on your 2023 tax return. That does, if you deduct your traditional IRA contribution, that will reduce your taxable income for 2023. But if the 5498 is reporting a Roth IRA contribution, that does not change your taxable income at all. That also does not get reported on your tax return at all.
If the 5498 is reporting a rollover from a 401k, that does not change your taxable income at all. That will not change how your tax return is filed. And if it’s reporting an RMD, then that also should have already been reported on your tax return because you also get a 1099R for your RMD. That does not change your taxable income, or at least the RMD amount being reported on 5498 does not change your taxable income. You taking in an RMD does. But so only for traditional IRAs does it reduce your taxable income. But like I said, any of that should have already been reported on your tax return. So the 5498 does not actually change any of that. Again, it’s just information.
Murs Tariq:
So it’s kind of like it’s checks and balances, right? If you report on your tax return that I’m going to put in the max allowable into my traditional IRA for the year, and let’s say it’s seven or 8,000. So you put that on your tax return, but there’s no way that the IRS actually knows that you actually put the money into the account, but they gave you a tax benefit for it. Right? So is the 5498, it is reported to the IRS, right? Eventually?
Taylor Wolverton:
Yes, exactly. Yeah. The form 5498, and actually all of your tax forms, the custodian will send a version of that report or the form to you and a copy to the IRS. So you’re getting the 5498 and the IRS is also getting a 5498. So it’s exactly that. It’s a way for the IRS to reconcile, we saw this deduction for your traditional IRA on your tax return. Now the custodian needs to confirm with the form 5498, that that contribution actually went into your IRA.
Radon Stancil:
Okay. So could you give us an example then of a rollover contribution type scenario?
Taylor Wolverton:
Yeah. Okay. So let’s say in 2023, someone had their 401k at Empower. If they chose to transfer their 401k from Empower and put it into a traditional IRA at Schwab, they would get a 1099R probably sometime in January or February from Empower from the custodian that their 401k came out of. So the 1099R from Empower would show the 401k is no longer there. The full amount of whatever the balance was at the time that you did the rollover would be reported as technically a distribution, but it’ll be coded as a rollover, which means it’s not taxable. So then in May of 2024, Schwab where that 401k was then transferred to in an IRA, Schwab will send out Form 5498 to show that same amount from the 401k was then transferred into the traditional IRA and it was received at Schwab.
So again, it’s a way to reconcile if you did a rollover from your 401k custodian, if we say it’s in power in this example, that they distributed that amount and instead of going into your checking account, it went into the traditional IRA Schwab as it should have. So it’s a way for the IRS to see that where it left, where the money left, went then and was contributed into the account in the way that it should have been, rather than some shady things like if you were trying to get money out of your 401k and then just not reporting on that, that went to your checking account or something because then you’d have to pay taxes and penalties on that potentially. So yeah, more just checks and balances of seeing the distribution on one form, seeing the contribution on the other form on the other side.
Murs Tariq:
Yes. Gotcha. And we mentioned that this document comes out in May or June timeframe, whereas 1099s typically come out sometime in February or maybe a little bit later, but earlier in the year. So you have what you need to file your taxes is when 1099s come out. So why so late in the year for 5498s?
Taylor Wolverton:
Yeah, you probably think it’s kind of inconvenient. Why can the 5498 not just come out in January or February along with all the other tax forms, so you can just get it all together at one time? But there is a delay because Roth IRA and traditional IRA contributions are reported on form 5498. The deadline to contribute to those accounts is the same as the tax filing deadline, April 15th. So if, for example, you wanted to make a Roth IRA contribution for 2023, you have until April 15th, 2024 to make that contribution. So because those contributions get reported on form 5498, they have to wait until after the contribution deadline to release that form. So it’s really just some processing time from the custodians to get all the information for what contributions were made before April 15th, and then send that form out soon after in May.
Radon Stancil:
All right, so we talked about this. I’ve filed my taxes and now I get this 5498. Do I need to go do anything with the 5498 when it comes to my tax return?
Taylor Wolverton:
No, fortunately. If you have already filed your 2023 tax return or the April 15th deadline, then you’re completely good. It doesn’t change anything that was reported on your tax return. So you can just keep that form with your other tax records and you’re good to go. No changes necessary.
Murs Tariq:
Okay. Well, I think we’ve said form 5498 enough to where we’re not able to say it well anymore. So Taylor, thanks for coming on for this episode. It is a tax focused episode, but it is important. So you get that email from your custodian and now after listening to it that it’s not anything you need to worry about. You don’t need to refile your taxes. It’s just there as a piece of information to show that you did what you were supposed to do. So thanks a lot for coming on. As always, if anyone, you have questions around things like these topics, these conversations, we’re happy to engage with you, we’re happy to set up a call. But thanks again, Taylor, for your time.