Tax filing for IRAs is usually straightforward. If you make a deductible contribution to your Traditional IRA, your IRA custodian will send you IRS Form 5498 showing your contribution. You will then show your deduction on Schedule 1 (Part II) and attach this to your Form 1040. If you take a fully taxable distribution from your Traditional IRA, you will get an IRS Form 1099-R from your custodian. You will enter the distribution amount on line 4a (of your Form 1040) and the distribution amount as taxable on line 4b. Simple. However, other transactions may require you to submit additional forms to the IRS.
Additional Forms Needed for Certain Transactions
Sometimes, you may need to attach other IRS forms to your federal tax return. For example, you may have taken an early distribution to which an exception to the 10 percent penalty applies, but Form 1099-R does not reflect that exception. Or you may have to explain why a nonqualified Roth IRA distribution is not taxable. You may need to submit one (or both) of the following forms to the IRS to ensure that you properly determine your tax obligation.
IRS Form 5329: Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts
IRS Form 5329 is filed with your federal income tax return to pay certain penalties (or "additional taxes," as the IRS calls them) or to claim an exception from such penalties. Common transactions that lead to penalties include
- Distributions before age 59½,
- Excess IRA contributions (if not timely corrected) and
- Missing a required minimum distribution (RMD).
If you have taken an early Traditional IRA distribution and want to pay the penalty, you will not have to file Form 5329; you can pay the 10 percent penalty on your Form 1040 (or other) federal return. But if you claim an exception to the penalty, you must file Form 5329.
In 2024, you took payments from your IRA before you reached age 59 ½, but these payments qualified as a series of substantially equal periodic payments, which are not subject to the 10% penalty. If your IRS Form 1099-R contains a code "1" (for an early distribution), you will have to attach Form 5329 to your return with a code "02" to tell the IRS that the penalty does not apply.
You can also use Form 5329 to request other penalty waivers. For instance, you may request a waiver of the penalty for a missed RMD by attaching an explanation for the failure. The instructions for Form 5329 provide the details of this waiver.
Note: Qualified charitable distributions (QCDs) are reported as "normal" Traditional IRA distributions even though they are not included as income. Taxpayers must report QCDs to the IRS on Form 1040 (or related return) to indicate they are not taxable.
IRS Form 8606: Nondeductible IRAs
Another form, IRS Form 8606, may need to be filed with a tax return. IRA owners must use this form to report any of these 2024 transactions:
- You made a nondeductible (or after-tax) contribution to a Traditional IRA.
- You took a distribution from a Traditional, SEP, or SIMPLE IRA, and there is an after-tax basis in any such IRA you own.
- You converted Traditional, SEP, or SIMPLE IRA assets to a Roth IRA.
- You took a nonqualified distribution from a Roth IRA.
These types of transactions are common, so IRA owners should learn when they must report them on Form 8606. Proper reporting with this form has significant tax implications. The results can be costly if taxpayers fail to file it when needed. For example, IRS custodians typically report Traditional IRA distributions as fully taxable on Form 1099-R (but also indicating that the "Taxable amount [is] not determined"). But what if the IRA owner has previously made after-tax contributions to an IRA? Then, any distribution will necessarily contain a portion of the after-tax assets. Taxpayers who do not correctly report the distribution on Form 8606 will either pay too much tax—or may risk a possible IRS audit if the tax return does not reflect the distribution information provided on Form 1099-R.
Seek Sound Advice
We cannot cover all the scenarios in which IRA owners might have to attach additional forms or explanations to their federal tax returns. However, we want to remind you that additional tax-filing rules may be associated with IRA contributions and distributions. Addressing these details is the role of competent tax professionals.
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