By: Daniel Gleich
Key Points
- Self-Directed IRA (SDIRA) investors are the sole decision makers of their retirement savings. Therefore, they’re responsible for filing its respective tax forms.
- Not all Self-Directed IRA tax forms must be completed by you as the account holder.
- It’s considered best practice to familiarize yourself with Form 1099-R, Form 5498, Form 990-T, Form 8606, and Form 1040.
If you’re an alternative investor, there’s a chance you may be required to file certain Self-Directed IRA tax forms. While this may seem like the fine print of financial freedom, getting familiar with a few key forms will save you a world of time down the road. You won’t be traversing this tax form escapade alone: Madison Trust will handle some of the heavy lifting and keep you informed on the rest. Consider this your referential guide to the essential tax forms every SDIRA investor should know – because understanding the rules can mean mastering the investment realm with confidence.
Self-Directed IRA Tax Form #1: 1099-R
Form 1099-R is filed by your Self-Directed IRA custodian. Although your custodian will provide you with the actual documentation to complete, your only assignment is to fill in the blanks and return to sender.
This Self-Directed IRA tax form is used to report distributions from retirement accounts and is eligible to be filled out by any SDIRA holder who’s taken a distribution of $10 or more during the respective tax year. This form will indicate the type of distribution that’s taken (such as a required minimum distribution, early withdrawal, etc.), and indicate any federal or state taxes that were withheld from these distributions. In addition, if you’ve participated in a Roth IRA conversion, rollover, or a recharacterization this tax year, you’ll also be asked to file Form 1099-R.
How to File a 1099-R
Madison Trust is obligated to mail form 1099-R to you – the SDIRA owner – by January 31st of the calendar year following the taxable event. You will then take your copy of the 1099-R and send it to your accountant or tax preparer along with your typical tax season documents.
Self-Directed IRA Tax Form #2: Form 5498
IRS Form 5498 is used to report contributions, rollovers, conversions, and the fair market value (FMV) of a Self-Directed IRA. Fair market value refers to the price at which an asset would exchange between a willing buyer and seller who are both well informed on the asset and under no pressure to act. As the account owner, it is your duty to calculate the FMV of all assets in your SDIRA.
This sum is requested as Self-Directed IRAs are innovative vehicles – they typically hold non-traditional assets such as real estate, precious metals, private equity, and beyond. Providing accurate valuation of your assets shows to the IRS that your account is compliant to their rules and regulations. Furthermore, this knowledge helps put you in a seemingly better position if you were to one day be audited.
How to File Form 5498
Although there are no taxes paid on this form, your custodian is still required to send it annually to the IRS. They must electronically file Form 5498 even if no changes have been made to the valuation of your account. Madison Trust will provide you with a blank 5498 to complete. This must be returned with the total FMV of all assets in your account as of December 31st. Madison will then file Form 5498 with the IRS by May 31st of the following year.
You may also be asked to provide supporting documentation to show evidence of your valuation. This supplemental information will differ depending on the particularities of your alternative investment. (Appraisal reports, financial statements, etc.). Consulting with a financial advisor and industry professional is greatly encouraged to ensure you have produced all necessary documentation.
Self-Directed IRA Tax Form #3: Form 990-T
The IRS Form 990-T is also referred to as the Exempt Organization Business Income Tax Return. This form is circumstantial, as SDIRA owners will only need to file this Self-Directed IRA tax form in the following situations:
- If your account generates $1,000 or more in gross income from an unrelated trade or business. This income would be known as Unrelated Business Taxable Income (UBTI). This can occur if your SDIRA invests in pass-through entities like LLCs, partnerships, or crowdfunding/syndications that conduct active business operations. This is a situation where UBIT (Unrelated Business Income Tax) would arise.
- If your SDIRA used leverage (such as a non-recourse loan) to acquire or enhance an income-producing asset, your earnings attributable to the debt may be subject to UBIT. Acquiring this is also known as unrelated debt financed income (UDFI).
How to File Form 990-T
If your SDIRA is privy to any of the aforementioned events, it is then your responsibility as the account holder to file this form. It’s imperative that you ensure your 990-T is filed under your Self-Directed IRA name and EIN, and not you as an individual.
It’s considered best practice to have a Certified Public Accountant (CPA) look at your completed form to guarantee accuracy. Once this is achieved, simply forward your completed form to Madison Trust for our signature. After we’ve countersigned, we’ll send it back to you, and you’ll file the form with the IRS by April 15th, the same due date as individual tax returns.
Self-Directed IRA Tax Form #4: Form 8606
IRS Form 8606 is used to report non-deductible contributions to Self-Directed Traditional IRAs, track conversions to Self-Directed Roth IRAs, and manage the basis of funds within these accounts. It prevents double taxation by ensuring that funds already taxed, such as non-deductible contributions or Roth conversions, are not taxed again when withdrawn. The form also tracks after-tax contributions and helps determine the five-year holding period required for penalty-free Roth IRA distributions.
How to File Form 8606
Similar to Form 990-T, completing and filing Form 8606 is the account owner’s concern. You should file this form if you made non-deductible contributions to a Self-Directed Traditional IRA, received distributions from a Self-Directed SEP IRA or Self-Directed SIMPLE IRA, converted amounts from any IRA, or received distributions from a Self-Directed Roth IRA.
Your custodian does not have to provide you with this form, but you may find it beneficial to check in with them and see if that’s something they typically share with clients. Form 8606 can be found on the IRS website and must be filed by the standard tax deadline of April 15th.
Self-Directed IRA Tax Form #5: Form 1040
Form 1040 is relatively standard as it’s the U.S. Individual Income Tax Return and the primary tax form used by individuals to report their annual income and claim deductions and/or credits. If you’ve taken distributions this year, you need to fill your distributions on lines 4a and 4b. This is because distributions are considered a form of income.
How to File Form 1040
As a taxpayer, it is your obligation to complete this form on your own behalf, and file it with the IRS. Like most tax forms, the deadline is April 15th.
Tackle Those Tax Papers!
Sending papers to the IRS is your annual mission to accomplish to keep your retirement savings in good standing. A little bit of work can result in a retirement of ease and incentives. If you want to gain a firmer grasp on what’s required of you as a Self-Directed IRA filer, schedule a call with one of our Specialists and get your questions answered!
