If you own an IRA, your IRA custodian should provide you with at least one year-end statement. Year-end statements you may receive include your fair market value (FMV) statement, IRS Form 1099-R and, if you are of RMD age, your RMD notification statement. By law, these must be mailed to you by January 31. And don't just toss these statements aside: they may include information that will affect your tax return. Here we'll take a look at the year-end statements IRA holders should expect to receive and what information they contain.
Tutorial: Retirement Planning
Fair Market Value Statement
The fair market value (FMV) statement tells you the balance of your IRA as of December 31 of the previous year. For Traditional, SEP and SIMPLE IRA owners who are of RMD age, as well as for IRA beneficiaries, this figure is used in conjunction with the applicable life expectancy to calculate RMD amounts for the year.
For instance, the FMV for December 31, 2013, is used to calculate the RMD for year 2014. Many financial service providers include the FMV in the account-activity statement issued for January; others may provide the information in a separate document. Regardless of the format of delivery, the FMV will be clearly identified as such and should include a statement that the information will be reported to the IRS.
Required Minimum Distribution Notice
If you are of RMD age in 2014, your IRA custodian must send you an RMD notification by January 31 reminding you of your obligation to distribute your RMD for 2014. The IRA custodian may either calculate the RMD amount and provide the calculation in your notification, or include an offer to calculate the amount upon your request. This notification may be included with your FMV statement or mailed separately. (For more insight, read 6 Important Retirement Plan RMD Rules.)
Form 1099-Q is used to report all distributions from Coverdell education savings accounts (ESAs) and qualified tuition programs. Your financial services provider may include a special code to indicate whether the distribution is due to death, disability, return of excess contributions or a prohibited transaction. These codes will help you and the IRS determine if the earnings included with the amount distributed is subject to income tax and/or any early-distribution penalty. (For more insight, check out Analyzing IRA And ESA Statements.)
IRS Form 1099-R
Form 1099-R reports distributions of $10 or more from pension plans, annuities, profit sharing plans, IRAs, 403(b) plans and so forth. Recharacterizations between Traditional and Roth IRAs are also reported on this form. In most cases, the issuer will indicate whether the amount reported on the 1099-R is taxable.
While the reporting may meet IRS requirements, it could be incorrect from your perspective. For instance, assume you received a distribution of $10,000 from your IRA in 2013. The issuer may indicate on Form 1099-R that the full amount of $10,000 is taxable. However, the actual taxable amount may be different. As the IRA owner, you are responsible for ensuring that the correct information or explanation is provided on your income tax return. Failure to do so could result in you paying taxes and/or penalties on amounts that should be tax and/or penalty free. Below are some scenarios that demonstrate how the taxable amount indicated on Form 1099-R could be different from the information you must actually indicate on your tax return.
1. Making Deductible and Nondeductible Contributions
Over the years, you made both deductible and nondeductible contributions to your Traditional IRA. According to IRS requirements, a distribution that occurs from any of your Traditional IRAs must include a pro-rata amount of taxable and nontaxable assets. However, because your IRA custodian is not required to keep track of your deductible and nondeductible assets or indicate the portion of your IRA distribution that is nontaxable, the amount you received is reported on your 1099-R as fully taxable. To ensure the IRS knows how much of the amount is really taxable, you must file IRS Form 8606. The instructions for Form 8606 include information to help you calculate and determine the taxable and nontaxable amount of your distribution.
2. You Use Your IRA to Purchase Your First Home
You received a distribution of $10,000 from your IRA, and the amount was used towards the purchase of your first home. Although the IRS provides that the amount will not be subject to the early distribution penalty, this exception was not noted on the Form 1099-R that you received. You must therefore file IRS Form 5329 to claim the exception.
3. You Received a Distribution, but Rolled It Over
You received a distribution of $20,000 from your IRA, which you later rolled over within 60 days. This means that the amount is not taxable and is also not subject to the early distributions penalty. However, as required, your IRA custodian reports the amount as fully taxable. To rectify this, you must make the appropriate adjustments on your 1040 Form. This is usually done by inputting $20,000 as the distribution amount and $0 as the taxable amount. For example, on IRS Form 1040, $20,000 would be inputted on line 15a and $0 on line 15b.
What Should You Do with These Statements?
Provide copies of all of these statements to your tax professional, so that he or she can handle the information as appropriate. With one exception, these statements are for your records only and should not be attached to your tax return. The exception applies to a Form 1099-R that reports a distribution for which you had federal taxes withheld from the amount. In this case, you must attach the Form 1099-R to your tax return.
Check your mail carefully to ensure that you don't discard these important documents with your junk mail. When in doubt, deliver all documents to your tax professional along with your other important tax documents. Your tax preparer should be able to determine what must be included on your tax return for the year.