If your employees, like many Americans, use an individual retirement arrangement, or IRA, to save for retirement, they should receive tax form 5498: IRA Contributions Information each year. By May 31, whichever institution oversees their IRA is required to report all contributions made during a given tax year to the IRS. The form that they receive summarizes this information.
What do I do with form 5498?
Since this form isn’t submitted until the end of May, your employees are not responsible for including this in their tax filings but should keep it for their own records.
There are four different types of IRAs: traditional, simplified employee pension (SEP), savings incentive match plan for employees (SIMPLE), or Roth. Depending on which type of IRA the employee has, different boxes on the form will be populated: Box 1 for traditional, Box 8 for SEP, Box 9 for SIMPLE and Box 10 for Roth.
It’s possible to switch from one type of IRA to another and, while these rollovers or conversions of assets aren’t deductible, they are contributions and are summarized in Boxes 2 and 3. Be aware, though, that rollovers between trustees of certain types of accounts won’t show up on this form. For example, these rollovers will not appear on the form:
Traditional IRA → Traditional IRA
Traditional IRA → SEP IRA
SIMPLE IRA→ SIMPLE IRA
SEP IRA→ SEP IRA
SEP IRA→ Traditional IRA
ROTH IRA→ ROTH IRA
If your employees are unsure of which type of IRA they have, their trustee may indicate this in Box 7.
With a traditional IRA, your employees aren’t required to make withdrawals until the year that they turn 70 ½ years old. Prior to this, IRA contributions are tax deductible and can accumulate earnings, but withdrawals are considered income and must be reported as such.
One advantage of having a traditional IRA isthat contributions made during a given year can actually be applied to theprior tax year; they just have to identify which year the contribution is for. This assignment is required by the tax filing deadline in April, which is why the institution that manages their account has until May 31 to file on their end.
Although your employees can’t use contributions to a Roth IRA as a tax deduction since withdrawals made during retirement aren’t taxable, there are still tax advantages to having one. Meeting specific tax criteria, including income, makes certain contributions eligible for the tax saver’s credit.
SIMPLE and SEP IRAs
Both SIMPLE and SEP IRAs are arrangements where you, the employer, make contributions to the account.
With SIMPLE IRAs, employers withhold certain amounts from the employee’s paycheck which go toward retirement. These contributions are made on a tax-free basis. Then, their income totals are calculated after these deductions are already made.
Only employers can make contributions to SEP IRAs, so the contributions that employees see for this are not deductible.
For more information on tax form 5498: IRA Contributions Information, visit the IRS website for more specific details and instructions.