Analyzing IRA And ESA Statements

If you made contributions to your IRA or Coverdell Education Savings Account (ESA) for the last tax year, you should receive a statement from your IRA custodian confirming the transactions. For IRAs, the transactions are reported on Form 5498 and for ESAs the transactions are reported on Form 5498-ESA. Unless your custodian gets approval from the IRS to extend the deadline for providing you with these forms, Form 5498 must be mailed to you by May 31, and Form 5498-ESA must be mailed to you by April 30. Here we take a look at some of the things to look for when verifying the transactions reported on these forms.

Tutorial: Education Savings Accounts (ESA)

Why These Forms Are Mailed After Tax Filing Date
Most tax forms need to be included on taxpayers' tax returns; as such, they are provided to taxpayers before their tax filing deadline. Forms 5498 and 5498-ESA are exceptions to this practice because they include transactions that could occur after the tax filing date (generally April 15). Since the postmarked date of April 15 is acceptable for meeting the deadline for making IRA and ESA contributions, many contributions are deposited to the accounts after the tax filing deadline. Custodians must be given some latitude for recording these transactions, so taxpayers are not required to attach these forms to their tax returns.

Common Transactions Reported on Form 5498 and 5498-ESA

Annual Contributions
The most common transactions reported on Forms 5498 and 5498-ESA are regular contributions made between January 1, 2012, and April 15, 2013 ( for 2012). Even though you are not required to file these forms with your tax return, your custodian must report the amounts to the IRS, which, in turn, uses your custodian\'s 5498 report to keep tally of your contributions. It is therefore very important that that you check the forms for accuracy and notify your custodian of any discrepancies.

A common error that occurs on Form 5498 is the failure to include contributions for the previous year made between January 1 and April 15. This may happen either because the IRA owner failed to indicate that the contribution was being made for the previous year, accompanying instructions were inadvertently separated from the check, or simply because the IRA custodian made a mistake.
Rollover Contributions
Distributions from an IRA, ESA, a qualified plan, 403(b) or 457(b) plan that are properly rolled over are not taxable. If these amounts were rolled over to your IRA or ESA, they should be reported on Forms 5498 and 5498-ESA respectively; otherwise, the IRS\'s records will conflict with yours, and they may send you a notification stating that you owe taxes. Should you find that the 5498 does not reflect the correct rollover amounts, contact your custodian immediately.
A taxpayer may elect to treat a contribution made to one type of IRA as if it were made to another type of IRA. To do so, the taxpayer must instruct the IRA custodian to recharacterize the contribution. It is important to note that in addition to receiving a report of the recharacterization, you will also receive a report of the original contribution. For instance, assume you made a contribution of $3,000 to your Traditional IRA for 2012. On the advice of your tax professional, you later decided to recharacterize the contribution to your Roth IRA. Your IRA custodian will still issue a 5498 for the contribution to your Traditional IRA (in Box 1) and the recharacterization will be reported in Box 4. Bear in mind also that the recharacterized amount may be different from the contribution amount, since earnings or loss must be taken into account (see Recharacterizing Your IRA Contribution or Roth Conversion?).
SEP and SIMPLE Contributions
Most questions on Form 5498 are related to SEP and SIMPLE contributions. Many individuals expect the IRA custodian to report the amounts contributed for the year in the SEP or SIMPLE box (whichever is applicable), but the IRS requires that the report include only amounts actually contributed to the account in the year. For SEP and SIMPLE IRAs, the 5498 must include contributions made between January 1, 2012, to December 31, 2012. This is unlike the procedures for IRA contributions, where amounts contributed up to April 15 in the current year are included on the 5498 for the previous year if they are designated as such.
One of the key reasons for this SEP/SIMPLE reporting requirement is that employers have until their tax filing deadline, including extensions, to deposit contributions to participants\' IRAs. These deadlines are often extended up to August 15, which is after the deadline for issuing Form 5498 to IRA owners, making it impossible to include these SEP/SIMPLE amounts on the forms. Many IRA owners and small business owners find this disconcerting, because the 5498 may not match their records. However, the IRS is aware of this discrepancy, so it is highly unlikely that anything will be questioned.

5498 Tips:

  • Track Roth and ESA basis - Distributions of regular contributions from your Roth IRAs are always tax and penalty free. (see the article Tax Treatment of Roth IRA Distributions.) To some extent, this rule applies to distributions from ESAs. Your Form 5498/5498-ESA helps you to keep track of your accumulated contributions, and makes it easier to determine if distributions are attributed to regular contributions, conversions and/or earnings.
  • Multiple 5498/5498-ESA -Tally the contributions reported on your forms for the year. If your contributions exceed the allowable limits, be sure to make corrections and avoid penalties. Excess contributions often occur in ESAs because multiple individuals establish and fund multiple ESAs for one beneficiary (ESA owner).
  • Revoked contributions - IRA owners may choose to revoke their IRA contributions within seven days of establishing the IRA. The IRA custodian must still report the amount as a regular contribution, even if it is revoked. If you instructed your IRA custodian to revoke your contribution, make sure you receive Form 1099-R from the custodian to offset the transaction reported as a regular contribution.

While Form 5498/5498-ESA are not required to be filed with your tax return, they are a very important part of one's tax records. For many, the 5498 is the only means of accounting for the source of transactions, such as regular contributions. But, these forms are helpful only if they are accurate. Individuals should remember to verify the information provided on the forms, and notify their custodian and/or tax professional of any inaccuracy.