An individual retirement account (IRA) custodian/trustee is responsible for proper Internal Revenue Service (IRS) reporting. The annual reporting requirements apply to traditional (including simplified employee pension – SEP) IRAs, Roth IRAs, and Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRAs. The reports help an IRA owner, or a beneficiary after an IRA owner’s death, document IRA activity on his/her federal income tax return. Additionally, reports allow the IRS to monitor this tax reporting. This article discusses the IRS reporting requirements after the death of an IRA owner.
Post death reporting in general
When an IRA owner dies, ownership of the IRA passes to the IRA beneficiary. An IRA beneficiary is either an individual or a nonindividual, and either named by the IRA owner, the IRA agreement, or state law. Year of death reporting is unique because it requires reporting for the decedent and each beneficiary. However, for years after an IRA owner’s year of death, reporting is required only for the beneficiary(ies).
Revenue Procedure 89-52 and the IRS Form 5498 reporting instructions require that an IRA custodian/trustee complete the following reporting as it relates to a deceased IRA owner and the beneficiary(ies) of the decedent’s IRA:
- Annual statement reporting the fair market value (FMV)
- Provided to the IRA owner/beneficiary
- Deadline is January 31
- IRS Form 5498, IRA Contribution Information, reporting contributions (made by an IRA owner to his/her IRA) and the FMV
- Provided to the IRA owner/beneficiary and the IRS
- Deadline is May 31
- Title on a beneficiary’s Form 5498 must include the decedent’s name and the beneficiary’s name (e.g., Tom Smith, Beneficiary of John Smith’s IRA)
- IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., reports distributions from an IRA
- Provided to the IRA owner/beneficiary
- Deadline is January 31
- Traditional or SIMPLE IRA beneficiary distributions reported using IRS Code 4
- Roth IRA beneficiary distributions reported using either IRS Code T or Q
Year of Death Form 5498
A Form 5498 must be provided in the decedent’s name and social security number (SSN) or tax identification number (TIN) for the year of death. Additionally, a Form 5498 must be provided to each beneficiary that had a reportable balance in the IRA on December 31. The forms must report the FMV of the IRA in the following manner:
The decedent’s Form 5498:
- Reports the date of death FMV, including gains and losses, or
- Using the alternative method, enter a 0 (zero) as the FMV
The executor of the decedent’s estate will need the date of death FMV for estate valuation purposes and potentially for income tax purposes if one more of the decedent’s IRAs contains nondeductible contributions, and the decedent received an IRA distribution in the year of his/her death.
The beneficiary’s Form 5498:
- Report the December 31 FMV of a beneficiary’s share of the decedent’s IRA
Year of Death Form 1099-R
A Form 1099-R must be provided in the distribution recipient's name and SSN or TIN in the following manner:
The decedent’s Form 1099-R:
- Report distributions taken during the year of death by the IRA owner prior to his/her date of death in his/her name and SSN or TIN
The beneficiary’s Form 1099-R:
- Report all distributions taken by a beneficiary after an IRA owner’s death as death distributions in the beneficiary’s name and SSN/TIN
Years After an IRA Owner’s Year of Death (Forms 5498 and 1099-R)
No reports are generated in a decedent’s name for any year after the year of his/her death. The beneficiary will continue to receive a Form 5498 reporting the December 31 FMV for each year there is a balance in the beneficiary IRA on December 31. A Form 1099-R is generated for each year the beneficiary takes a distribution.
Tim, age 73, died in 2019, leaving his traditional IRA to his spouse Kayla. Tim did not take any distributions prior to his death and his RMD for 2019 was $3,800; however, Kayla took Tim’s RMD of $3,800 by December 31, 2019. The IRA custodian/trustee will generate the following reports for 2019:
- 2019 Form 5498 reporting any contributions Tim made in and for tax year 2019 prior to his death, and the date of death FMV or a FMV of 0 (zero)
- 2019 Form 1099-R reporting the distribution of Tim’s RMD (taken by Kayla) in Kayla’s name and SSN as a death distribution (IRS Code 4)
- 2019 Form 5498 reporting Kayla’s December 31 FMV of her beneficiary IRA. The report is titled “Kayla as Beneficiary of Tim’s Traditional IRA”
In 2020, Kayla decides to “treat” her deceased husband’s IRA (i.e., her beneficiary IRA) as her own IRA by having it transferred into her own personal IRA. As a result, there will not be a 2020 Form 5498 generated for Kayla’s beneficiary IRA. Additionally, Kayla did not take any distributions before or after treating Tim’s IRA (i.e., her beneficiary IRA) as her own IRA. As a result, there will not be a 2020 Form 1099-R generated for either IRA, however:
- There will be a 2020 Form 5498 for what is now her own IRA reporting contributions she made to her IRA in or for tax year 2020 (if any), and the December 31 FMV
Establishing a beneficiary IRA
To generate the required reports in the appropriate individual’s name and SSN/TIN, it might be necessary for an IRA custodian/trustee to create a separate account for each IRA beneficiary (i.e., beneficiary IRA, sub account, dummy account, etc.) on its data processing system. Please note that some data processing systems may not require this. Additionally, it is generally not necessary for an IRA custodian/trustee to interact with IRA beneficiaries when creating a beneficiary IRAs in its data processing system. Again, the primary purpose for a custodian/trustee to create a separate account for each beneficiary in this case is to have a method/means by which it can complete the necessary reporting for each beneficiary.
Some examples of beneficiary IRA titling include:
- Justin Smith, as beneficiary of Lori Smith, IRA
- Habitat for Humanity, as beneficiary of Lori Smith, Roth IRA
- Justin Smith’s Living Trust, as beneficiary of Lori Smith, IRA
After an IRA custodian/trustee creates a beneficiary IRA, it transfers the beneficiary’s allocated share from the decedent’s IRA to the beneficiary IRA. It is from the beneficiary IRA the custodian/trustee then administers death distributions, FMV reporting, etc.
A common misunderstanding among many IRA custodians/trustees is that a beneficiary must sign an IRA establishment document in conjunction with creating a beneficiary IRA on its data processing system. Neither the tax law nor the regulations require that a beneficiary execute any type of documentation when an IRA custodian/trustee creates a beneficiary IRA on its data processing system, however policies of the custodian/trustee may require it.
Notification of death and reporting
If an IRA custodian/trustee has no knowledge of an IRA owner’s death until after May 31 of the year after death (i.e., the reporting deadline for IRS Form 5498), no corrected Form 5498 is required. However, proper and timely reporting must commence once an IRA owner’s death is confirmed.
If designation of a successor beneficiary by a primary beneficiary is not prohibited by state law, and an IRA custodian/trustee allows a primary beneficiary to name a successor beneficiary and the primary beneficiary subsequently passes away, the IRS Instructions for Forms 1099-R and 5498 require titling comparable to the examples provided above. In other words, the deceased primary beneficiary’s name and the successor beneficiary’s name should both be included on IRS Form 5498.
Justin Smith, an IRA owner passes away in 2019 leaving his IRA to his son Eric. A beneficiary IRA is established and titled accordingly (i.e., “Eric Smith as beneficiary of Justin Smith’s IRA”). Eric subsequently passes away in 2021 and the assets are inherited by Eric’s successor beneficiary, Sharon Smith. The custodian/trustee establishes a beneficiary IRA titled, “Sharon Smith as beneficiary of Eric Smith’s IRA” and then must prepare the same reports as outlined above for an IRA owner and the beneficiay(ies) of his/her IRA.
The steps an IRA custodian/trustee must take to accomplish the accounting and reporting of an IRA after an account owner’s death are dependent its data processing system and procedures. For this reason, it is critically important that an IRA custodian/trustee understand what the IRS requires from a reporting standpoint after an IRA owner passes away, how its data processing system works, and what the procedures are to accomplish the reporting accurately and timely. Please see the IRS’s Instructions for Forms 1099-R and 5498 for further information.
For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts and Coverdell Education Savings Accounts, consider our on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or call us at 1-800-552-9408.