Form 5498 Reporting Made Easy: Navigating Repayments and Postponed Contributions
The IRA contribution reporting season is now underway. Form 5498, IRA Contribution Information, reporting is due to the IRS and to your IRA account owners by May 31. That means it’s a good time to clear up some common misconceptions about reporting postponed contributions and repayments. Between IRS rules, natural disaster extensions, and the new SECURE 2.0 Act provisions, understanding what should (and shouldn’t) be included on Form 5498 can save you and your team headaches down the road.
Let’s Look at the Basics: Repayments vs. Contributions
It’s easy to mix up repayments and postponed contributions, but the IRS treats them differently. A repayment typically stems from a distribution that is eligible to be paid back—such as a qualified disaster recovery distribution. Postponed contributions, on the other hand, are late contributions made under special IRS extensions, usually in response to disasters or military service.
Both must be reported correctly on Form 5498 to ensure compliance and avoid unnecessary mistakes and uncomfortable conversations with account owners.
Reporting Repayment Contributions
Repayment contributions are different than rollovers, which also involve a return of money to an IRA. Repayment contribution amounts are reported on Form 5498 in Box 14a, Repayments. The applicable repayment code should be reported in Box 14b, Code. Individuals may make repayments of qualified reservist distributions, qualified disaster recovery distributions, or qualified birth or adoption distributions.
SECURE 2.0 Act: New Penalty Tax Exceptions and Repayment Options to Know
The SECURE 2.0 Act introduced new repayment and distribution exceptions that affect IRA contribution reporting. Here are some key provisions to keep in mind.
Qualified Disaster Recovery Distributions and Repayments: Account owners affected by federally declared disasters may take penalty-free distributions of up to $22,000 and repay them over three years.
Domestic Abuse Distributions: IRA owners who are victims of domestic abuse, or who have a child or household member who is a victim, can withdraw up to $10,300 penalty-free. They also have the option to repay the distribution over three years, with repayments reported similarly to qualified disaster recovery distributions.
Terminal Illness Distributions: The SECURE 2.0 Act creates a new 10 percent early distribution penalty tax exception for terminally ill individuals. There is no limit to the amount that an individual may receive as a terminally ill distribution. A physician must certify that the individual has an illness that can reasonably be expected to result in death within 84 months or less after the date of certification. These distributions may be repaid to the IRA within a three-year period.
Emergency Expense Distributions: Starting in 2024, IRA owners can take one penalty-free distribution per year for emergency expenses, with the option to repay it within three years. An IRA owner can take an eligible distribution amount that equals the lesser of $1,000 or an amount that equals the IRA balance, minus $1,000. For example, if an IRA owner has $1,800 in her Traditional IRA, the emergency expense distribution can’t exceed $800. IRA owners can repay these distributions over a three-year period. In addition to the one-per-year limitation, a subsequent emergency expense distribution may not be taken during the three subsequent calendar years unless either a repayment—or aggregate contributions equal to the previous emergency expense distribution—have been made.
Repayment codes your financial organization may encounter for tax reporting include the following.
QR — repayment of a qualified reservist distribution
DD — repayment of a qualified disaster recovery distribution
BA — repayment of a qualified birth or adoption distribution
EP — repayment of an emergency personal expense
DA — repayment of a domestic abuse victim distribution
TI — repayment of a terminally ill individual distribution
The repayment period for these qualified distributions is three years, starting the day after the distribution was taken.
Reporting Postponed Contributions
Postponed contributions are rollover contributions made in the current tax year but designated for a prior year for various reasons. These contributions may include late rollovers self-certified by the IRA owner, qualified plan loan offsets, and postponed contributions from taxpayers affected by federally designated disasters or for military personnel who served in a specific combat zone, hazardous duty area, or direct support area.
When financial organizations report postponed contributions, they should enter
the contribution amounts in Box 13a, Postponed/late contrib.,
the tax year for which the contribution is made in Box 13b, Year, and
the applicable military operation or event indicator code in Box 13c, Code.
o SC – self-certification of a late rollover contribution
o PO – qualified plan loan offset
o FD – federally designated disaster
o PL115-97 – Sinai Peninsula of Egypt
o EO13119 (or PL106-21) – Yugoslavia operations area
o EO13239 – Afghanistan and associated direct support areas
o EO12744 – Arabian Peninsula areas
The Instructions for Forms 1099-R and 5498 contain detailed descriptions for each zone or area. The IRS may provide special instructions for reporting specific postponed contributions so always verify the latest IRS guidance. Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs), is a good resource to pass along to IRA owners who need more information about these special contributions.
Avoiding Reporting Errors
Correctly handling repayments and postponed contributions is crucial for compliance and maintaining client trust. As Form 5498 reporting continues to show increased repayments and varying repayment codes, it’s easy for mistakes to occur. Special reporting may need to be done manually if processing platforms are not automated for these codes. Sometimes staff members aren’t familiar with how to report them and what codes to use.
Ascensus’ Fully-Administered Program can take the stress out of your Form 5498 reporting. Our Fully-Administered Program catches reporting errors ahead of time to ensure that your tax reporting forms, including Forms 5498, are accurate. Our secure online processing system programmed with compliance logic called IRAdirect® catches errors that can be corrected before IRA owners receive their tax forms.
With Ascensus’ Fully-Administered Program, your staff can use our special contribution forms with your clients and enter the information directly into IRAdirect®. There’s no need to memorize or research repayment or postponed contribution codes. Our drop-down menus make it easy to complete, offering code definitions and preventing code mismatches through the form completion process. Once the forms are ready and compliant, Ascensus then files the proper forms with the IRS and applicable state agency and sends them to your clients as part of the Fully-Administered Program.
For more information on how Ascensus’ Fully-Administered Program can minimize errors and position your organization as a leader in IRA management, email us at salessupport@ascensus.com.
