By Brian Kuhn
Learn more about Brian on NerdWallet’s Ask an Advisor
In late May or early June sometimes an IRS form arrives in the mail. Why does another tax document arrive when tax season ended two months ago? Sometimes people get concerned that they forgot to report a transaction on their return or the IRS is trying to notify them of additional taxable income, and therefore tax due. In the case of the 5498, however, thankfully they can rest assured that everything is alright, despite the odd timing of the mail.
The IRS tracks every single investor’s IRA values and the locations of those assets from the beginning of their existence all the way to the last distribution taken by their beneficiaries long after their death. Why would the IRS do such a thing? Take a guess: tax revenue. Can you imagine the manpower and computer systems required to track the value and location of every IRA in the country over generations of time? That’s where the 5498 comes in.
It isn’t a perfect process but whenever an IRA contribution is made, or an employer plan such as a 401(k), 403(b), or TSP is rolled over to an IRA, the receiving company is required to report to the owner and to the IRS its receipt using the 5498. This acts as an offsetting document to what the taxpayer puts on their return for the year the transaction occurred. In general, if an IRA contribution is made that action reduces taxable income and also the amount of tax due. In the case of a rollover it appears to the IRS that money was removed from a qualified plan which up until then is pre-tax. The IRS asks questions like, “Did that money actually go into an IRA account?” and, “when this money was removed from the qualified plan did it go into the owner’s pocket, or another tax deferred account?” As long as that 5498 is maintained in a file for the appropriate tax year you should be fine should the IRS ever come calling.
If you’ve received a 5498 that means you made an IRA contribution or did a rollover last year. Both of these actions are attempts to better position yourself for the future so you should be commended. If you want to do either of these things that’s where someone like a financial planner can come in and help.
Many times an old employer retirement plan isn’t still sitting there because the investment choices have been recognized as the best available. It is often simply because a better option hasn’t presented itself, or the process of actually doing the rollover is confusing. How do you fill out the forms? Where do you get the forms since you no longer work at the company and in some cases haven’t for years? Where do the forms go after you complete them? How do you make sure you don’t accidentally take receipt of the funds, causing a taxable event?
Managing your personal finances sometimes isn’t about complicated investment analysis. It is just about getting quick, efficient assistance so you can move on with your life’s to-do list.