*IRS update March 29, 2021: 2020 tax returns and IRA contribution deadlines extended to May 17, 2021 (June 15, 2021, for residents of Texas, Oklahoma, and Louisiana). IRS Form 5498 filing deadline extended to June 30, 2021.
Nothing was “normal” in 2020, including your tax-qualified retirement savings accounts. Investment values were up and down, deadlines were extended, and distribution requirements were waived. With high hopes that 2021 will be less eventful, here’s a reminder of the important deadlines that affect your self-directed IRA and the actions you can take to make certain you’re in control of your retirement savings in 2021.
You will receive some important statements from your IRA custodian in January. Review them to ensure their accuracy; they will affect your tax liability for 2020 or future years.
January 31 – Your IRA custodian must send you a Fair Market Value Statement each year with the prior year December 31 value of your IRA. Many IRA custodians use the year-end statement of your IRA investments to report this information to you. If your IRA holds alternative investments that don’t have a readily attainable fair market value, you must provide a valuation to your IRA custodian each year determined by the investment issuer or third-party valuation agent.
January 31 – If you withdrew money or investments from your IRA in 2020, you will receive a copy of IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. This form reports distributions from the IRA in 2020 and alerts the IRS to additional taxable income for 2020. Form 1099-R does not reflect activity that could reduce your tax liability for the distributions, such as rolling over an IRA distribution, taking a distribution that includes nondeductible contributions (basis), meeting the requirements of a CARES Act distribution, or qualifying for an exception to the 10% early distribution tax. You must notify the IRS on your tax return that you qualify for reduced tax liability as a result of any of these situations.
January 31 – Your IRA custodian will notify you if you must take a required minimum distribution (RMD) for 2021. RMDs were waived for 2020, but they are back for 2021. This RMD notice may come as a separate notice or be included with the Fair Market Value Statement or other statement in January.
A valuation of your alternative investments as of December 31, 2020, must be provided to your IRA custodian each year. Depending on the type of investments in your IRA, you may need to make arrangements to have your investments valued by a qualified appraiser.
If you did not max out your IRA contributions for 2020, you still have time to contribute and take a deduction on your tax return for 2020. You can contribute up to $6,000 (or 100% of your income if less) to your Traditional and Roth IRAs ($7,000 if you’re age 50 or older) until *May 17, 2021, as a contribution for 2020. Be sure to include instructions with your deposit if you want your IRA custodian to code the contribution for 2020, rather than 2021.
*May 17 – For calendar-year individual income tax return filers, *May 17, 2021, is the deadline to file your 2020 income tax return and for making IRA contributions for 2020. If you took a CARES Act distribution and want to spread the tax liability over three years, you must make the election on your 2020 tax return.
*June 15 – For calendar-year individual income tax return filers who are residents of Texas, Oklahoma, or Louisiana, June 15, 2021, is the deadline to file your 2020 income tax return and for making IRA contributions for 2020. If you took a CARES Act distribution and want to spread the tax liability over three years, you must make the election on your 2020 tax return.
*June 30 – Your IRA custodian must provide you with a copy of IRS Form 5498, IRA Contribution Information, to report all contributions made to your IRA for 2020. This includes annual contributions, rollovers, conversions, and recharacterizations. Form 5498 must also include the fair market value of your entire IRA and separately report the value of certain hard-to-value investments in your IRA. This information is filed with the IRS, so it’s important to provide accurate valuations to your IRA custodian and make sure your tax returns contain information that matches what is reported on Form 5498.
July – August
Enjoy your summer! There are no tax or IRS reporting requirements for IRAs during the summer months. So, this may be a good time to conduct a mid-year review of your IRA investments. Are they performing as well as you expected? Are they meeting your investment objectives? Are they aligned with your risk tolerance? A self-directed IRA provides you the freedom to invest your IRA in a wide array of alternative investments, such as real estate and precious metals, that offer diversification from the more traditional investments tied to the stock market. Make an appointment to talk to your financial advisor this summer if you haven’t met with him or her yet this year.
Revisit your beneficiary designation for your IRAs. Have your personal circumstances changed this year, such as a marriage, divorce, or birth of a child? Have you opened a new IRA or transferred assets between IRAs? Even if you haven’t changed anything, make sure your beneficiaries’ addresses, telephone numbers, and email information on file with your IRA custodian are correct. An accurate beneficiary designation will help ensure that legal rights to your IRA assets will be transferred to your beneficiary upon your death—outside of probate.
If you must take an RMD in 2021, schedule the distribution with your IRA custodian now to ensure it is processed by December 31. (If you are turning 72 in 2021, you may wait until April 1, 2022, to take your 2021 RMD.) The amount you are required to take will be based on your December 31, 2020, IRA balance. If you have alternative assets that must be liquidated to meet the RMD requirement, consider whether you want to take an in-kind distribution of your investment instead, or if you can satisfy your RMD from another IRA with more liquid assets. If you still have earned income, you may contribute to your IRA each year to increase the pool of liquid assets available for distributing RMDs (although this may increase the amount you are required to take each year).
By this point in the tax year, you will have a good idea of your taxable income for the year and your tax bracket. You may want to consider converting some of your Traditional, SEP or SIMPLE IRA assets to a Roth IRA. This is a taxable transaction, so it could increase your tax liability for 2021. But Roth IRAs are not subject to the RMD requirements while you’re alive, and all Roth IRA distributions can be tax-free, even investment growth. If you’re interested in creating a tax-free income stream in retirement or for your heirs, talk to your financial or tax advisor about the benefits and considerations of converting pre-tax retirement assets to an after-tax Roth IRA.
December 31 – Take your RMD, if applicable, before December 31. If you are a beneficiary of an IRA, you may need to elect a payment option or take a payment from an inherited IRA by December 31. If an IRA owner or beneficiary fails to take a required payment, they are subject to a 50% excess accumulation tax on the portion of the amount that should have been distributed but remained in the IRA. December 31 is also the deadline to complete a conversion to a Roth IRA if you want the additional income counted for the 2021 tax year. Talk to your tax advisor before the end of the year if any of these situations apply to you … and get ready for 2022!