What is tax form 5498 and what's the purpose of filing it?

The IRS allows individuals to bank some substantial tax deductions if they contribute to an individual retirement account (IRA) to bolster their pension.

What is tax form 5498 and what's the purpose of filing it?

Some tax filers choose to utilise an individual retirement account (IRA), which allows them to save for their retirement with more favourable tax conditions. This can take the form of a traditional IRA, a roth IRA or a rollover IRA, each of which has different benefits.

However in order to keep the IRS updated about any IRA contributions that you have made you will need to complete Form 5498, which also covers any applicable recharacterisations, conversions, and year-end fair market values.

Even though roth IRAs do not qualify for a tax deduction, you still need to make sure that any contributions are reported to the IRS in the same way. Here’s everything you need to know about filing tax form 5498.

Why do I need to file tax form 5498?

To receive the tax deductions and other benefits involved with individual retirement accounts you must complete what the IRS call “IRA Contribution Information," also known as form 5498. This will allow you to provide details on how much you have contributed to an IRA over the past fiscal year.

Filing form 5498 will allow you to take advantage of the tax benefits but you are not necessarily entitled to deduct the full amount; the IRS has set contribution limits for the IRAs which limit the amount you can receive.

The limit for those younger than 50 is $6,000 per year, while anyone aged 50 or above can contribute up to $7,000 to their IRA and get the full deduction. These limits have remained unchanged for 2020 and 2021 tax years, but the IRS does alter the thresholds periodically to reflect inflation.

Is an IRA a good investment?

Financial experts typically suggest that you will need up to 85% of your pre-retirement annual income during retirement. Some workplaces offer an employer-sponsored savings plan, like a 401(k), but this is not always sufficient.

For this reason an IRA might be a good option, allowing you to supplement your existing pension provision with regular payments. The IRA will also provide a wider range of investment choices and allows you to take advantage of the tax deductions claimed using the form 5498.

Of course the size of the pension pot that you build up is largely dependent on the amount of money you are able to contribute to it, but it is also a good idea to check out the various types of IRA on offer to ensure you’re getting the best deal. This handy IRA Contribution Calculator makes it easy to work out which is the best option for you.