Do I Need to Report Traditional IRA on Taxes?
Understand your tax obligations for a Traditional IRA. Learn how the movement of funds into, out of, or between accounts impacts your annual tax return.
While the existence of a Traditional IRA does not need to be reported on your tax return, certain activities must be reported to the IRS. Making contributions, taking distributions, or moving funds through rollovers and conversions are all reportable events. These actions have distinct tax implications and require specific forms to be filed with your tax return. Understanding how to report these transactions is part of managing your retirement savings effectively.
Reporting Contributions to a Traditional IRA
When you contribute to a Traditional IRA, the reporting requirements depend on whether the contribution is deductible. A deductible contribution lowers your adjusted gross income (AGI), potentially reducing your tax liability. The ability to deduct contributions is subject to income limitations, especially if you or your spouse are covered by a retirement plan at work. You claim this deduction on Schedule 1 of Form 1040.
Your financial institution reports your total contributions for the tax year to the IRS on Form 5498, IRA Contribution Information. You will receive a copy of this form, typically in May of the following year. This form serves as a record of your contribution activity, detailing regular contributions, rollovers, and conversions.
Individuals who do not qualify to deduct contributions due to high income levels can still make non-deductible contributions. These do not provide an immediate tax deduction but must be reported to the IRS using Form 8606, Nondeductible IRAs. Filing this form is mandatory when you make a non-deductible contribution.
The purpose of Form 8606 is to track your “basis” in the IRA, which is the total amount of after-tax money contributed. The form requires you to report your non-deductible contributions for the current year and your total basis from all prior years. This tracking prevents the IRS from taxing that money again when you withdraw it. Failure to file Form 8606 when required can result in a $50 penalty.
Reporting Distributions from a Traditional IRA
When you withdraw money from a Traditional IRA, the financial institution sends you Form 1099-R. You should receive this form by the end of January following the year of the distribution, and it details the total withdrawal. The gross distribution amount is in Box 1 and the taxable amount is in Box 2a.
The codes in Box 7 of Form 1099-R explain the nature of the distribution. For example, a code ‘1’ indicates an early distribution taken before age 59 ½, which may be subject to a penalty. A code ‘7’ signifies a normal distribution, which helps determine the correct tax treatment.
If all your contributions to the Traditional IRA were deductible, the entire distribution is generally taxable income. If your IRA contains non-deductible contributions, you have a basis in the account. You must use Form 8606 to calculate the taxable portion of your distribution using the pro-rata rule. This rule determines the ratio of non-taxable basis to the overall value of your IRAs, as your custodian may not track your basis.
Distributions taken before age 59 ½ are subject to a 10% additional tax on the taxable portion of the withdrawal, calculated on Form 5329. Several exceptions to this penalty exist and are also claimed on Form 5329. These exceptions include distributions for:
- The account owner’s death or disability
- A first-time home purchase, up to $10,000
- Certain medical expenses
- Higher education expenses
Reporting Rollovers and Roth Conversions
Moving funds between retirement accounts, a rollover, is a reportable event but is not taxable if done correctly. A direct rollover moves funds from one financial institution directly to another. An indirect rollover occurs when you receive a check for the distribution, which you have 60 days to deposit into another retirement account. You will receive a Form 1099-R and must report the rollover on Form 1040 to show it was not a taxable withdrawal.
A Roth conversion is when you move funds from a pre-tax Traditional IRA to an after-tax Roth IRA. This is a taxable event, and the converted amount is treated as ordinary income for the tax year in which the conversion occurs. You will receive a Form 1099-R for the amount moved from the Traditional IRA.
Reporting a Roth conversion and calculating the taxable amount is handled on Form 8606. A conversion is a taxable event in the year it takes place. For instance, if you contribute for tax year 2024 in early 2025 and then convert those funds, the conversion is reported on your 2025 tax return. If your Traditional IRA contains only pre-tax contributions, the entire conversion amount is taxable. If you have a basis from non-deductible contributions, Form 8606 is used to calculate the taxable portion, similar to the pro-rata rule for distributions.