Value of IRA fund at end of year? Why is this question being asked by TT

[Richard67]

TT Online is asking me a question on my trad. IRA that I don't previously remember being asked.  The cost basis has been inputed but the next question is to determine "value" of my IRA account at end of 2024.  It also refers to form 5498, which details a Fair Market Value at end of year, but which I generally don't receive until May and which I am pretty certain has a note that details it's not a required form for a tax return.    It's easy enough for me to answer the question but I don't understand why it's being asked?  Any advice?

[Richard67]

typo above...I mean "total basis" not "cost basis"

[dmertz · Accepted solution]

There are two separate areas of your tax return where the year-end value of your traditional IRAs might be needed.  First, if you've made an excess contribution to your traditional IRAs, the year-end value is needed to determine the penalty since the penalty determined on Form 5329 is 6% of the lesser of the excess or they year-end value.  Second, the year-end value is needed if you made any taxable distributions from your traditional IRAs and you have basis in nondeductible traditional IRA contributions, where the taxable amount needs to be determined on Form 8606.  In this second case, TurboTax might ask for the year end value before actually determining if Form 8606 is needed.  TurboTax asks for the year-end value separately for these cases, so it might ask twice and, if so, would need to be entered twice (or maybe even three times if you also have Roth IRAs that might have excess contributions and TurboTax needs to know the year-end value of your Roth IRAs).

Failing to provide the year-end value when TurboTax asks for it could result in an incorrectly prepared Form 5329 or Form 8606.  Also, jumping around in the TurboTax entry process could result in skipping the question when the value is actually needed, and TurboTax generally fails to catch and alert you about such an omission.

The IRA custodian is required to include the year-end value on your IRA year-end statement, so that's where you would typically look for the year-end value since the Form 5498 which reports the year-end value to the IRS is often not issued in time to help in preparing your tax return.

[Richard67]

Thank you @dmertz very clear.  

[Retire6060]

Thank you. I have a question along the same lines.  Should the 2024 year-end balance include 401K's? Also, I don't understand why the federal tax amount recalculates when I put different amounts into the box. I am retired and made no contributions nor took distributions (not at RMD age yet).

[dmertz]

A 401(k) is not an IRA.

The pro rata calculation on Form 8606 determines the taxable amount of IRA distributions.  The year-end value in traditional IRAs (not 401(k)s) is one of the values needed to perform that calculation on Form 8606 Part I.

[Retire6060]

Thank you for your clarification on 401k exclusion. I understand the concept of Form 8606. I have inserted different amounts in the valuation line to test results.  What I don't understand is that as I increase the value of the IRA valuation, the federal tax liability amount declines.  It's not a lot, but I don't understand. Is there an explanation?  Again, there was no contribution in 2024.  There was a Roth conversion.

[dmertz]

"What I don't understand is that as I increase the value of the IRA valuation, the federal tax liability amount declines."

That is a bit odd.  Are you sure that it's not a tax refund that is declining?

Otherwise, perhaps the increase in AGI is changing the amount of some tax credit you are receiving.  The way to sort this out is to look at your entire From 1040 to see how an increase in year-end value, and thus an increase in AGI and taxable income, is resulting in a decrease in tax liability.

[Retire6060]

Not sure what it might be, but will review.  Thanks very much for your help!