By: Rick Simonetti
Founding Partner, CEO & Head of Wealth Planning
[Prefer PDF? On your phone or tablet? Easy reading version here.]
Are you confused about how to report retirement plan information on your tax return? Do Forms 1099-R and 5498 give you a headache? If the answer to both is yes, that is not a surprise.
Now more than ever, taxpayers must closely track their retirement plan investments and distributions throughout the year in order to provide accurate information to their tax preparers.
To aid in this process, here are five questions we’re prompting clients to answer.
Have you made both deductible and non-deductible contributions to your IRA?
The calculation of the taxable amount of any distribution is complicated and often not possible for your custodian. Hopefully, if they cannot perform the calculation, they check the box that leaves the calculation to you and your tax preparer.
Do you have alternative investments?
Many investors today are broadening their allocations to include alternative investments. Often, those assets are held away from custodians, while the more traditional investments are held within retirement plans. Therefore, you must know to combine the year-end values in all accounts located within IRAs to calculate your Required Minimum Distributions. Importantly, the values of some alternative investments may not be determined until late in the year the distribution is required to be made.
Did you satisfy a capital call for a held-away IRA alternative investment out of a traditional IRA investment account?
Speaking of alternative investments… be careful that the transaction is tracked correctly or this may be reported as a distribution.
Making Qualified Charitable Distributions (QCDs) from your IRAs?
These assets are among the most efficient to fulfill your philanthropic goals, but the information will not show up on the forms you receive. You will have to provide the details to your tax professional to avoid paying taxes on QCDs reported as distributions on your 1099-Rs.
Taking a distribution prior to age 59½?
There are some situations/exceptions where the 10% penalty will not apply, but your custodian may not know about your use of the funds. Such exceptions include distributions used for qualifying medical expenses, health insurance premiums, higher education expenses, first-time home purchases, certain disaster withdrawals, or for distributions taken while terminally ill. This may require your tax preparer to file a form to correct the reporting on Form 1099-R.
Both recordkeeping and communication in all of these situations are critical. It’s also important to review the reporting provided by your custodian to see if it agrees with what you expected. If it does not, there are ways to fix the issue – but recognizing it is step one.
