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
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.
- 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.