If you have an existing tax-deferred retirement account, you need to know how to report relevant transactions on your federal tax return. Accurate reporting helps you maximize tax benefits and avoid penalties. One of the most common tax-deferred account types is an individual retirement arrangement (IRA). You can set up your IRA a few different ways, and each has different tax rules. While this guide gives you an overview of tax reporting for IRAs, tax laws can be complex, and consulting a professional is always recommended.
Do I Need to Report My IRA on My Taxes?
You may need to report your IRA on your taxes depending on what type of IRA you have and what transactions occurred.
The two main IRA types are traditional and Roth. Traditional IRAs are tax-deferred, meaning you contribute pre-tax funds, and your distributions are taxed. You must report contributions if you want to claim the deduction, and you report distributions as income.
Roth IRAs are tax-exempt, meaning you contribute after-tax funds, but the distributions are tax-free. Because you have already paid income taxes before contributing to a Roth IRA, you generally do not need to report transactions on your taxes.
Reporting Tax-Deferred Pension and Retirement Savings Plans on Form 1040
On Form 1040, you list IRA distributions on Line 4a and the taxable amount on Line 4b. List deductions on Line 12. If you are itemizing deductions, fill out Schedule A to determine your total deductions.
Interest earned from your IRA is not taxed in the year earned. A traditional IRA is tax-deferred, meaning you pay taxes when you take a distribution. In a Roth IRA, interest earnings are tax-free.
Taxable IRA Distributions
Any withdrawals or distributions from a traditional IRA are taxable. Most distributions are taxed as ordinary income at your standard income tax rate.
Withdrawing money from an IRA before you are age 59 ½ incurs a 10% penalty plus ordinary income tax. There are some exceptions, such as for medical expenses or first-time homebuyers. Additionally, with Roth IRAs, you can withdraw your contributions at any time, though withdrawing earnings early incurs the same penalties and taxes.
Once you reach age 73, you must take required minimum distributions (RMDs) each year from traditional IRAs. Your plan issuer should send you a 1099-R for your withdrawals, and you report them as ordinary income. Missing the deadline or not withdrawing enough can incur a tax penalty of 25%.
Roth accounts do not have RMDs for the original owner, but beneficiaries must make withdrawals. Incorrect rollovers may also be treated as a taxable distribution.
IRA Investment Tax Implications
Although Roth IRAs typically don’t need to be reported, different investments can affect taxation. If your Roth IRA is a self-directed IRA (SDIRA) invested in alternative assets, such as real estate or private equity, you may need to report income and pay taxes.
For example, if your SDIRA owns a rental property, you will owe taxes if the IRA earns more than $1,000 in unrelated business taxable income (UBTI). It’s best to have these types of investments in a Roth IRA because UBTI in a traditional IRA leads to double taxation — in the year it was earned and when you make a withdrawal.
It is always best to speak to a financial advisor about the potential tax implications of your investments.
Tax Advantages of Self-Directed IRAs
SDIRAs have the same tax benefits as standard IRAs, including compound growth, tax-free or tax-deferred withdrawals, and potentially higher returns. They also allow you more flexibility in where you can invest. With an SDIRA, you can choose alternative assets like real estate, private equity, cryptocurrencies and some precious metals.
Unlike standard IRAs, which are typically held at brokerage firms or banks, SDIRAs require a qualified financial institution approved to be a custodian, such as Accuplan Benefits Services. SDIRAs generally follow the same reporting rules as standard IRAs.
Frequently Asked Questions About IRA Taxes
Here are the answers to some additional questions commonly asked about IRA taxes.
Do I Need to Report My IRA if I Didn’t Make a Withdrawal?
You do not have to report your IRA if you do not make any withdrawals. However, contributions to traditional IRAs are tax-deductible, so you must report them to claim the deduction. Because Roth IRA contributions are not tax-deductible, you don’t need to report them.
If you rolled over or transferred money into an IRA from another retirement account, you may need to report it even if it is not considered a taxable event. For example, if the rollover involved a distribution from a qualified plan into an IRA, you need to report the distribution.
Are Tax-Deferred Retirement Funds Taxable Upon Withdrawal?
Withdrawals from traditional, SEP and SIMPLE IRAs are taxable on withdrawal at your regular earned income rate. You may owe additional taxes if you’re younger than 59 ½. Withdrawals from Roth IRAs are tax-free and don’t need to be reported if you are 59 ½ or older.
Can I Reduce My Taxable Income With IRA Contributions?
Contributions to traditional IRAs are tax-deductible, meaning anything you put in your IRA you can subtract from your taxable income. You should receive Form 5498 from your plan issuer for any contributions you made.
However, contributing more than you’re allowed means you will be taxed 6% on the excess every year until you fix the error. For most people, the 2024 and 2025 limits for traditional and Roth IRAs are $7,000, with an additional $1,000 allowed if you are 50 or older. Note that this limit is total for all your IRAs, not per account.
With SEP IRAs, employee contributions are limited to $16,000, with a $3,500 catch-up contribution allowed if you’re over 50. Some IRAs have additional restrictions. For example, high-income earners generally can’t contribute directly to a Roth IRA, and only employers can contribute to SEP IRAs.
Contact Accuplan Benefits Services for Expert Guidance
To make the most of your IRA, work with a specialist. At Accuplan Benefits Services, we focus on administering self-directed IRAs and manage over $1.5 billion in assets. Our experts are dedicated to helping you understand how to use these accounts to the fullest extent.
If you’re interested in investing in alternative assets, reach out to us or open an account today!
Our information shouldn’t be relied upon for investment advice but simply for information and educational purposes only. It is not intended to provide, nor should it be relied upon for accounting, legal, tax or investment advice.
