Under federal tax laws, your Roth individual retirement arrangement (IRA) contributions are held by a third party, such as a bank or investment company. The third party acts as the trustee, which means that you can only add or subtract money from the account by contacting the custodian. The Internal Revenue Service (IRS) requires Roth custodians to issue certain reports each year and the information on these reports has a direct impact on your tax liability.
Your Roth custodian must provide you with a report that details your Roth contributions and rollover contributions for the year. This report takes the form of the federal tax form 5498. Your custodian must provide you with a 5498 form for last year no later than May 31 of the current year. The tax year typically ends on 15 April but Roth custodians release this report after this date so that the form includes details of contributions that you make right up to the end of the tax year. You have the responsibility for keeping track of your Roth contributions and filing your taxes prior to the end of the tax year.
Required Minimum Distributions
The 5498 form also details your Roth account balance as of December 31 of the previous year. Your account balance impacts your tax liability because on certain types of IRAs you are required to start making withdrawals once you reach the age of 70 1/2. Since custodians use the same 5498 form for all types of IRAs, the form that you receive includes a box that shows the dollar amount of your required minimum distribution (RMD) for the year. However, RMDs are only necessary on pre-tax accounts and Roths are funded with after-tax funds, so your Roth custodian should leave this field blank.
Your Roth custodian must provide you with a 1099 federal tax form if you made any withdrawals from your Roth IRA during the last year. If you hold a Roth for five years or more and make no withdrawals until you reach the age of 59 1/2 then you do not have to pay tax on your withdrawals although details of the transaction are still reported. If you withdraw funds from your Roth prior to age 59 1/2 then you pay income tax and a 10 percent tax penalty on your earnings. Your custodian does not automatically withhold funds to cover taxes, but you can ask your custodian to deduct taxes before the funds are disbursed. The 1099 form includes details of your tax withholding.
You receive a 1099 if you rollover your Roth IRA to an account held by a different custodian. When you conduct such a withdrawal you gain direct access to the money and you have 60 days to reinvest the money in another Roth. If you do not complete the rollover then the IRS recharacterizes the transaction as a taxable withdrawal. If you successfully complete the rollover then you pay no taxes because you receive a 5498 form from the new custodian that offsets the withdrawal listed on the 1099 you received from the old custodian. If you arrange a trustee-to-trustee transfer, the funds are passed directly between custodians -- so you never have access to the money. You do not get a 1099 or a 5498 when you complete such a transfer.
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