Tax Reporting on your Self-Directed IRA
It’s that time of year again where we scramble for our W-2s and report our yearly earnings in the hopes of a big tax return. However, tax time can be especially stressful if you are unsure of what you need to file to avoid a run-in with the IRS.
In addition to your gross income, investors need to be aware of their responsibilities when it comes to tax reporting on self-directed IRAs. If you own an SDIRA, it is crucial to perform your due diligence and see that the correct items are completed by you and your custodian to get the full benefit of your investments.
If you are unsure what steps are necessary to report taxing for your self-directed IRA, here are a few helpful tips.
Before you dive into your taxes, take the steps to gather all your information for your personal tax return and your self-directed account. Meet with your custodian and be sure you have all the proper forms and any updated information directly regarding your assets.
The forms filed for your self-directed IRA are not part of your regular tax return. Be sure to keep the information separate as you prepare to file. When you have the necessary papers, consider the responsibilities of you and your IRA custodian.
IRA Custodian Responsibilities
Your IRA custodian has specific tasks they must perform annually as per IRS regulations. To avoid any possible issues, be sure they fill out the proper forms in a timely manner.
The 5498 Form is the first thing your custodian should complete. This report captures all IRA contributions, Roth conversions, required minimum distributions taken and the account’s fair market value. While no taxes are due or paid as a result of this form, it is an accurate depiction of your transactions throughout the year.
In addition to the 5498 Form, custodians are responsible for a 1099-R Form. This form reports on your IRA distributions for the year, Roth IRA conversions, and any rollovers that are not direct IRA trustee-to IRA trustee. This report is filed to bring attention to any distributions or Roth conversions.
These amounts are subject to tax and are a part of your personal tax return. Before filing your own tax return, be sure your custodian completes these reports.
Owner Actions and Responsibilities
After your custodian does their part, depending on your SDIRA investments, you may have to fill out forms as well. Consider what type of IRA you have before filing your taxes.
If your IRA is in a partnership, LLC, or LP, you or your partner must fill out a 1065 Partnership Tax Return. Your partner should file the 1065 tax return and issue a K-1 to your IRA for the share of income or loss. These forms should be prepared using your custodian’s tax ID for your IRA’s K-1.
A 100% IRA owned LLC should be disregarded – a single member – and there is no need to file a return. This process must be completed by March 15th with a possible six-month extension available.
If your IRA has Unrelated Business Income Tax, or UBIT, you need to file a 990-T IRA Tax Return. This tax return is specific for any taxes due and they are paid from the IRA. While you don’t normally have to file this form, if your IRA has a non-recourse loan (UDFI tax) or non-passive real estate investments like house flipping, you may have to file. If your IRA account has been charged UBIT or UDFI, you must report it to the IRS. The deadline for this form is April 15th with a six-month extension available.
In addition to forms for your self-directed IRA account, if you own an individual 401K, you must fill out an additional form. The 5500-EZ form (or any Form 5500) must be filed. If your 401K accumulated less than $250,000 in assets by the last day of the plan year, you do not have to file. However, to be sure, perform your due diligence and contact your financial advisor.
Preparing for the New Year
Tax time can be the most stressful time of year. As you step into 2020, it helps to be prepared for anything. Perform your due diligence and discuss your self-directed IRA taxes with your IRA custodian. Take the steps needed to get the proper forms, report your IRA earnings, and leave no stone unturned. Head into the New Year confident and continue to build your nest egg for a financially secure future. For additional information, contact a Horizon Trust custodian today.