October 28, 2020

How To File Tax Forms for a Self Directed IRA

Investing with a Self Directed IRA comes with several responsibilities. One important task all IRA accountholders must perform is filing tax forms. The good news is that you’re not alone. Madison will be submitting some of the forms, and can help keep you informed with the rest. Below is a break-down of what needs to be reported and how to file tax forms for a Self Directed IRA.  

Self Directed IRA Custodian's Tax Forms

The following forms are filed annually by the custodian:  

IRS FORMPurposeHow To File
Form 1099-RTo inform the IRS that funds or assets have left your IRA. Common events that generate the 1099-R include: a distribution, Roth conversion, recharacterization, or rollover.  Madison Trust will mail Form 1099-R to the IRA owner by January 31st of the calendar year following the taxable event. IRA owners will provide a copy of the form to their tax preparer, as it is needed for the tax return.  
Form 5498To report the fair market value of the IRA based on the client-reported last-known-value. This form reports all IRA contributions, Roth conversions, rollovers, and recharacterizations.Form 5498 is filed for your records only. No action is necessary and there are no taxes paid due to this form. Madison will electronically file Form 5498 directly with the IRS by June 1st of the relevant year.     

Self Directed IRA Owner's Tax Forms

Depending on the investment, an IRA owner may be required to file this form with the IRS: 

IRS Form PurposeHow To File
Form 990-TTo report if the IRA investment generated UBIT (Unrelated Business Income Tax) and/or UDFI (Unrelated Debt Financed Income).   
UBIT occurs when:  
An IRA invests in a business that generates “active income”. Common active income scenarios include being a partner in an LLC that sells goods and services (c-corporations are exempt) or ongoing short-term real estate flips.  
UDFI occurs when: 
An IRA uses leverage to purchase an investment. For example, UDFI is due on the earnings of a property that was purchased with a non-recourse loan.
After having a CPA prepare the form, forward the completed form to Madison Trust Company for signature. Madison Trust Company will then return the countersigned form to the accountholder to file with the IRS.  
Due Date: April 15th (6 month extension is available)  

Self Directed IRA Tax Reporting Doesn't Have to be Stressful

To eliminate stress during tax season, IRA owners should perform due diligence and speak to a Self Directed IRA Specialist. Be prepared to file tax forms for your Self Directed IRA by obtaining the proper forms, reporting the fair market value of your IRA, and paying any necessary taxes. The more informed you are of the Self Directed IRA tax rules, the easier your route to financial freedom.  

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