10 frequently asked questions about IRAs
1- When is my IRA contribution due? Your traditional and Roth IRA contribution must be made no later than April 18. If you make your contributions in year 2016, make sure your financial institution reports the deposit for year 2015. Your SEP IRA contribution for year 2015 isn’t due until you file your tax return (that could be as late as October 15 if you file an extension).
2- How much can I contribute to an IRA? The IRS may annually adjust contribution maximums.
3- How do I report my Roth IRA contributions? Roth IRA contributions are not tax reportable nor are they deductible from your income. Your financial institution will report the contribution to the IRS on form 5498 in late May. However, you must report a Roth IRA conversion on your 1040 form (using information provided to you on the 1099-R form). Keep in mind, you’ll owe taxes on the taxable part of the Roth IRA conversion in the year you make the conversion.
4- How do I report my deductible traditional IRA contribution? You report your deductible IRA contribution on your personal tax return 1040.
5- Why does my tax professional insist my traditional IRA contribution was not tax deductible? In certain circumstances, when either you or your spouse was an active participant in a company plan last year, that deduction can be reduced or eliminated. But just because you lose your ability to deduct an IRA contribution doesn’t mean you lose the ability to make an IRA contribution. In fact, the ability to make an IRA contribution is never affected by having too much income.
6- Why would I put money into an IRA if I’m not getting a deduction? Deductions are great, but even if you don’t get one, there are reasons to contribution to an IRA. Here are three:
- Any earnings on your contributions will still grow tax-deferred.
- You’ll have more money in a retirement account that can be converted to a Roth IRA.
- You don’t have to pay tax on your after-tax contributions when they are distributed to you or converted.
7- How do I report my nondeductible traditional IRA contribution? You have to tell the IRS what (if any) portion of your IRA contribution is made up of nondeductible, after-tax money. To do this, you must file Form 8606. Note: your nondeductible IRA is tax free when distributed, but it is generally distributed proportionally with any pretax IRA money. This is known as the pro rata rule.
8- I am self-employed and I made contributions to a retirement plan on behalf of my employees, how do I report these contributions? These contributions are generally considered a business deduction, and as a business deduction, they are deductible on Schedule C, Profit or Loss from Business (Sole Proprietorship) of your Form 1040. Schedule C deductions reduce the overall profit of your business which, in turn, not only reduces your taxable income, but also your self-employment tax.
9- I made a mistake with my IRA contribution, how do I correct this? It’s great to make an IRA or Roth IRA contribution, but you must be allowed to make one. To be eligible, you must have earned income. For most people, this is either through W-2 wages or self-employment income. Also, you are prohibited from contributing to an IRA once you reach age 70 ½ and Roth IRA contributions are prohibited once you reach certain income thresholds. If you mistakenly contribute to one of these accounts when you’re not allowed to do so (or you contribute more than what’s allowed), that amount is considered an “excess contribution” and is potentially subject to a 6% penalty for each year it remains in your account. So, it’s important to remove the contribution (and any earnings) as soon as you discover the error. Your financial institution will issue you a 1099-R and you will need to file a special form, IRS Form 5329.
10- I didn’t take out money from my IRA, so why am I still getting a 1099-R? Anytime you withdraw money from an IRA (regardless of the reason) your financial institution is required to issue you a 1099-R. It doesn’t necessarily mean you’ll owe taxes, but you’re required to report the distribution on your tax return. For example, you’ll get a 1099-R when you make a contribution to a Traditional IRA and then immediately convert it to a Roth IRA. You will also get a 1099-R when you do a rollover from your employer plan (401(K)) to an IRA. Make sure to report a 1099-R on your tax return.
Reporting IRAs on your tax return can be complicated. We strongly urge you to consult with your tax professional. Although we make every effort to ensure that the information we provide you is accurate, we cannot guarantee it.