909 (27th) IRAdirect - Ascensus, Inc. · requirements from several sources, including the Internal Revenue Code (IRC), Treasury regulations, Internal Revenue Service (IRS) pronouncements,

IRA Compliance

The material used in this text has been drawn from sources believed to be reliable. Every effort has been made to ensure the accuracy of the material, but the accuracy of this information is not guaranteed. The forms and laws are often changed without prior notice from the govern ment. The IRA Compliance manual is sold with the understanding that the publisher and the editor are not engaging in the practice of law or accounting.

April 2018 – The text is designed to address most IRA compliance issues. However, it may occasionally be necessary to refer to a more comprehensive text or other source to answer some questions. If you are unsure of an answer, consult a competent professional.

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Table of Contents • i

Table of Contents

Chapter 1Origins of ComplianceIRA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1Financial Organization Penalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3IRA Owner Penalty Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5Financial Organization Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6IRA Owner Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

Chapter 2Opening an IRAOverview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Trustees, Custodians, and Issuers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9IRA Opening Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Plan Agreement Contents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14IRA Disclosure Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18Customer Identification Program Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21Plan Agreement and Disclosure Statement Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23Beneficiary Designations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41IRA Contribution Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43IRA Opening Documents Log Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43

Chapter 3IRA WithholdingTraditional and Roth IRA Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47Liability for Withholding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48Withholding for U.S. Citizens and Resident Aliens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48Withholding for Nonresident Aliens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57Withholding for Expatriates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61Depositing and Reporting Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62State Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65Withholding Election Log Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67

ii • Table of Contents

Chapter 4IRA ReportingIRA Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .69Filing IRS Information Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71Form 5498 Contribution Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .79Form 1099-R Distribution Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81IRA Contributions and Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .85IRA-to-IRA Transfers and Rollovers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .94Retirement Plan Rollovers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99Recharacterizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103Conversions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .106Excess Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109Military and Disaster-Related Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .115Endowment Contract IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .120IRA Revocations or Account Closures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121Mergers and Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .122Reporting Corrections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .123Fair Market Value Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .130Account Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .131Required Minimum Distribution Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133IRA Reporting Activity Log Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .134

Chapter 5Performing an AuditOverview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .137Survey IRA Forms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .138Document Status Checklist: Traditional IRAs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .139Document Status Checklist: Roth IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141Survey IRA Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .143Operational Procedures Status Checklist. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .144Data Entry and File Maintenance Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .147Survey IRA Owner Files. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149Reviewing Opening Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .149Opening Documents Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .150Amendments Status Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .152Reviewing Reporting Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .154Traditional and Roth IRA Contributions Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .155Traditional and Roth IRA Distributions Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .158Annual Statements Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .160Reviewing Withholding Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .161Federal Withholding Requirements Checklist . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .162Common IRA Compliance Errors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .163Remedies for Compliance Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .163

Table of Contents • iii

Chapter 6Miscellaneous Compliance ConcernsDesigning an Efficient IRA Department. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .165Procedure Manual . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .167IRA File Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .169Record Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .171Importance of Training IRA Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .174Required Minimum Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .175IRA Beneficiary Distribution Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181Traditional IRA Beneficiary Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .184Roth IRA Beneficiary Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .194

Chapter 7Handling Legal IssuesHandling Legal Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .197Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .198Guardianship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .200Creditors of IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .201Investment Protection for IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .203Community and Marital Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .204Transfers Incident to Divorce or Legal Separation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .205Beneficiary Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .207Missing IRA Owners and Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .211Abandoned IRAs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .212Small Estate Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .214Minors as IRA Owners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .214Mergers and Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .215Hold Harmless Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .216Final Fiduciary Rule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .217Prohibited Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .218Abusive Tax-Shelter Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .225IRA Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .226

Glossary of Terms

iv • Table of Contents

Importance of Compliance • v

Importance of ComplianceIndividual retirement arrangement (IRA) compliance is one of the most significant concerns for financial organizations that serve as IRA trustees, custodians, and issuers. If the IRS arrives to audit an IRA department, what will the examiners look for? Will they search for complete records of past transactions or assess present operations? What are the IRA administrator’s responsibilities? The IRA Compliance manual addresses relevant topics about Traditional and Roth IRA compliance with laws and related Treasury regulations.

The IRA Compliance manual focuses on Traditional and Roth IRAs—the most common types of individual retirement arrangements. Simplified employee pension (SEP) plans and savings incentive match plan for employees of small employers (SIMPLE) IRA plans are IRA-based employer-sponsored retirement plans. These employer plans are covered in the Ascensus IRA Reference Service and the IRA Fact Book.

Compliance Is More Than Avoiding Monetary PenaltiesThe Internal Revenue Code specifically addresses the financial organization’s responsibilities and potential penalties if those responsibilities are not met. As a result, most financial organizations equate compliance concerns with the potential monetary penalties. While the specific fines represent an integral part of IRA compliance, the overall issue of IRA compliance is much broader.

Legislative and Regulatory Changes to IRAsAlmost every year, Congress passes laws that affect retirement. The IRS periodically releases guidance in the form of Treasury regulations, revenue procedures, notices, publications, etc. Because of the volume and immediacy of newly mandated rules and procedures, IRA personnel must familiarize themselves with the newest guidance. The IRA Compliance manual contains the most up-to-date IRA information available at the time of its publication and covers how recent rule changes affect IRA compliance.

Using This Manual

Terms to NoteTo make understanding IRA compliance issues easier, the IRA Compliance manual may use simplified terms of which readers should be aware. Many different types of organizations offer IRAs, including banks, savings and loan associations, credit unions, insurance companies, brokerage firms. When this manual refers to IRA administrators or financial organizations, the term is inclusive of all types of organizations offering IRAs. Also note, entities that are not insurance companies often act in the capacity of either trustees or custodians, while insurance companies act in the capacity of issuers.

vi • Importance of Compliance

Scope and PurposeOrganizations offering IRAs do so in a constantly changing environment. Laws and rules change, organizations change, the industry continues to become more competitive, and many other intangible variables affect IRA programs. This manual is intended to explain IRA compliance issues from a federal law perspective. Because of substantial variations between state laws, IRA compliance concerns applicable to state-issued rules and regulations generally are not addressed. Financial organizations should consult with their legal advisors for any state law issues or changes that would affect their IRA programs.

Supporting IRS and DOL guidance (e.g., forms, Internal Revenue Code sections, DOL regulations) are sometimes referenced for additional background information. These items can be found by clicking on hyperlinks within this manual or are otherwise searchable at www.irs.gov or at www.dol.gov/agencies/ebsa.

NOTE: Hyperlinks to externally hosted forms at www.irs.gov generally go to the version identified by the IRS as the most current version of the form, unless there is some instructional value to linking to a specific year’s form. When linking out to an external IRS form, please verify that you’ve reached the version you intended, in case the IRS updates its URL addresses before the next update of this manual.

Origins of Compliance • 1

Chapter 1

Origins of ComplianceIRA Compliance

Financial Organization Penalties

IRA Owner Penalty Taxes

Financial Organization Responsibilities

IRA Owner Responsibilities

IRA Compliance

Financial organizations unfortunately do not have a single source to refer to for a complete list of all IRA compliance rules and regulations. Individual retirement arrangement (IRA) compliance is based on requirements from several sources, including the Internal Revenue Code (IRC), Treasury regulations, Internal Revenue Service (IRS) pronouncements, and other government directives.

Internal Revenue CodeThe Internal Revenue Code is created by Congress and is a compilation of federal laws governing the generation of revenue and includes laws that govern IRAs.

IRA owners are given the benefit of tax-deferred earnings, possible tax-free distributions, and, if eligible, income tax deductions for IRA contributions. To receive these tax benefits, IRA owners must follow certain rules regarding their IRAs. The rules address all aspects of the IRA, including IRA maintenance, deductions taken for the contributions, the timing of distributions, disbursements of dollars when the IRA owner dies, penalties for any IRA owner abuse in these areas, etc. The foundation for these rules is found in the Internal Revenue Code.

Some key sections in the Internal Revenue Code relating to IRAs are listed below.

• IRC Sec. 72(t) contains details on the 10 percent early distribution penalty tax and the various exceptions to this penalty.

• IRC Sec. 219 cites contribution limits and authorizes the deductions allowed for certain types of IRA contributions.

• IRC Sec. 401(a)(9) outlines the general rules for required minimum distributions (RMDs) and beneficiary options.

• IRC Sec. 402 explains the rules for making rollover contributions from employer-sponsored retirement plans into IRAs.

• IRC Sec. 408 outlines the general rules applying to IRAs.

• IRC Sec. 408A contains the general rules for Roth IRAs.

2 • Origins of Compliance

Treasury RegulationsThe IRS is the government agency that is responsible for writing Treasury regulations that interpret and implement the Internal Revenue Code.

There are three types of Treasury regulations, each with a different degree of authority. Treasury regulations may be released in the form of final, temporary, and proposed regulations, each of which is explained next.

Final Regulations (Treas. Regs.)Final regulations remain in effect as long as the applicable legislation remains unchanged or until the IRS rewrites the regulations. Final Treasury regulations are released in Treasury Decisions.

Temporary Regulations (Temp. Treas. Regs.)Temporary regulations provide temporary guidance when taxpayers need immediate guidance, but more time is needed to develop final regulations. Temporary regulations have the same authority as final regulations, and generally are effective until replaced by final regulations.

Proposed Regulations (Prop. Treas. Regs.)Proposed regulations usually are issued during periods when final regulations are being developed in a certain area. After proposed regulations are released, the IRS considers comments from the public and may hold hearings to gather industry input before making the regulations final. The IRS indicates in the proposed regulations the extent to which they may be relied upon before final regulations are completed.

Each section of the Treasury regulations corresponds to a particular section of the Internal Revenue Code. For example, IRC Sec. 6081 is the basic authority for the Secretary to grant an extension of time for filing any tax-related information returns, such as Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and Form 5498, IRA Contribution Information. Treas. Reg. 1.6081-1 provides more detail about the granting of filing extensions. Temporary Treasury regulations have similar numbering, except that the number sequence is followed by a “T.”

When the Treasury Department releases proposed regulations, the current method is that the release is given a six-digit identification number preceded by “REG” and followed by two digits denoting the year of drafting. Final regulations typically are released as Treasury Decisions (TD). For example, in January 2001, the IRS released the proposed Treasury regulations governing RMDs that were drafted in 2000. The initial release was identified as REG-130477-00 and REG-130481-00. Contained in this release, in addition to other sections, was Prop. Treas. Reg. 1.408-8 explaining RMD regulations specific to IRAs. The IRS released the final version of these regulations in TD 8987 in April 2002. The actual regulation citation, however, is Treas. Reg. 1.408-8.

Revenue RulingsThe IRS releases revenue rulings (Rev. Ruls.) as an interpretation of laws and Treasury regulations as applied to a specific set of facts. Revenue rulings may be relied on as the IRS’ official position on the specific set of facts. But the IRS reserves the right to restate any position by modifying or replacing a previously published ruling.

Revenue ProceduresRevenue procedures (Rev. Procs.) outline specific procedures necessary to comply with IRS rules and regulations.

Origins of Compliance • 3

IRS Announcements and NoticesThe IRS publishes announcements and notices in the Internal Revenue Bulletin. These pronouncements are published when taxpayers need immediate information on specific issues. The language in announcements and notices may appear later in revenue rulings or in procedures generated to explain the area covered in the announcement or notice in more detail. Taxpayers can rely on the information supplied in announcements and notices.

IRS PublicationsThe IRS annually releases publications designed to explain a variety of tax topics using layman’s terms. For example, IRS Publications 590-A, Contributions to Individual Retirement Arrangements (IRAs), and 590-B, Distributions from Individual Retirement Arrangements (IRAs), discuss essential IRA issues and are good resources for researching general IRA questions.

IRS FormsThe IRS publishes hundreds of forms and accompanying instructions every year. Often, the instructions to the forms contain information on certain rules or procedures that are not available from any other source. This is particularly true for procedures to satisfy reporting requirements.

Private Letter RulingsPrivate letter rulings (PLRs) are opinions written by the IRS in response to a written request from a taxpayer regarding a specific set of facts. A PLR may be relied upon only by the taxpayer who actually applied for the ruling. But a PLR gives some indication to all taxpayers about how the IRS views a particular issue.

Other ResourcesThe IRS uses the sources just discussed to inform IRA owners and financial organizations of how they must maintain IRAs. Compliance with these IRS rulings often depends on timely access to the information. Legislation and IRS pronouncements may come into play quickly. Additional information such as fact sheets and news releases may be found on some topics at the IRS website.

In this fluid environment, financial organizations need information immediately to coordinate operations that will accommodate the changes. Therefore, financial organizations should ensure their access to necessary information by using information sources or consulting services, regularly attending continuing education courses, and working closely with the organization’s advisors. In audit situations, the IRS does not view insufficient resources as a valid excuse for noncompliance.

Financial Organization Penalties

Avoiding IRS penalties is not difficult if financial organization personnel make a serious effort to learn, to keep up to date on, and to adhere to the strict requirements. Seminars, technical reference books, procedure manuals, professional publications, checklists, and internal compliance reviews all aid personnel in establishing and maintaining a trouble-free IRA department.

Financial organizations generally are concerned about compliance for two primary reasons: to avoid the monetary penalties assessed for noncompliance and, of course, to avoid jeopardizing the tax-deferred status of their clients’ IRAs. With respect to penalties, there are three general areas in which financial organizations may be fined for noncompliance: IRA opening documents, withholding on IRA distributions, and reporting IRA transactions. Each particular compliance concern is discussed in detail in the following chapters. And a summary of the requirements, authorities, and applicable penalties for financial organization noncompliance follows.

4 • Origins of Compliance

Financial Organization Penalties

OPEN

ING

DO

CU

MEN

TS

REQUIREMENT PENALTY CODE SECTION

Failure to provide to IRA owners a copy of the plan agreement (e.g., Form 5305 or 5305-A) or disclosure statements

$50 for each failure IRC Sec. 6693(a); Treas. Reg. 1.408-6(d)(4)(ix)

Failure to provide to IRA owners a copy of an amendment to the plan agreement or disclosure statement when such an amendment is required by the tax laws or regulations

$50 for each failure IRC Sec. 6693(a); Treas. Reg. 1.408-6(d)(4)(ix)

Failure to provide to IRA owners a properly completed disclosure statement (e.g., failure to take early withdrawal penalties into account when making IRA financial projections)

$50 for each failure IRC. Sec. 6693(a); Treas. Reg. 1.408-6(d)(4)(ix)

WITH

HO

LDIN

G

Failure to keep records necessary to report withholding to the IRS

$50 for each IRA for which proper records were not kept

IRC Sec. 6704; 6047(d)

Failure to withhold federal income tax on IRA distributions (or, in lieu of withholding, to obtain the signed election of the recipient not to have the tax withheld)

The financial organization must pay the tax required to be withheld.

IRC Sec. 3405(d)

Failure to give notice to recipients of the right to waive federal withholding on IRA distributions

$10 for each failure IRC Sec. 6652(h)

REPO

RTIN

G

Failure to provide a Form 5498 to IRA owners or the IRS

$50 for each failure IRC Sec. 6693(a); 408(i)

Failure to timely file with the IRS and to provide to IRA owners Form 1099-R

Subject to tiered penalty structure. (See “Tiered Penalty Structure for Form 1099-R Failures” in Chapter 4, IRA Reporting, for the specific penalties.)

IRC Sec. 6047(c); 6721; 6722; 408(i)

Origins of Compliance • 5

Financial Organization Penalties

REPO

RTIN

G (co

ntin

ued

)

REQUIREMENT PENALTY CODE SECTION

Failure to provide to IRA owners an account statement

$50 for each failure IRC Sec. 6693(a); Treas. Reg. 1.408-5(d)

Failure to provide to IRA owners a fair market value statement

$50 for each failure IRC Sec. 408(i); 6693(a)

Failure to provide an annual RMD statement

Unknown at this time IRC Sec. 408(i); Treas. Reg. 1.408-8

IRA Owner Penalty Taxes

Many financial organizations are concerned with compliance issues, even those that are the IRA owner’s responsibility. Although the IRA owner is responsible for noncompliance penalties for many of these transactions, financial organizations often provide assistance as a customer service. To provide the best customer service possible, financial organizations must be as knowledgeable about IRA owner responsibilities as they are about their own. A summary of IRA owner penalties follows.

Occasionally an IRA owner may question if the IRS has given clear guidance on whether a penalty tax will apply to the contemplated transaction. Rather than completing the transaction and exposing the IRA owner to a possible penalty, the IRA owner may apply to the IRS for a private letter ruling (PLR) for a predetermination of whether the transaction should be completed. The IRS charges a $10,000 fee for a PLR, as described in Rev. Proc. 2018-4. The procedures for applying for PLRs are outlined in Rev. Proc. 2018-4. Taxpayers considering applying for PLRs should consult with legal counsel or competent tax advisors.

IRA Owner Penalty Taxes

Deficiency Penalty Reference

Early distribution: any distribution made to an individual who is under age 59½ (certain exceptions apply)

10% penalty tax IRC Sec. 72(t)

Excess contribution: contributions made to an IRA that exceed the individual’s allowable contribution for the year

6% penalty tax IRC Sec. 4973

Excess accumulation: IRA owner does not remove entire required minimum distribution by due date

50% penalty tax IRC Sec. 4974

6 • Origins of Compliance

Financial Organization Responsibilities

Financial organizations have certain responsibilities regarding the administration of IRAs that help ensure compliance with IRA rules and regulations. These topics are discussed in more detail throughout this manual. Following is a brief list of the various responsibilities of financial organizations.

IRA Establishment1. Provide the IRA owner with a current plan agreement (or for IR annuities, an annuity endorsement with

the annuity contract), a disclosure statement, and a completed financial disclosure.

2. Retain a copy of the plan agreement and the disclosure statement signed by the IRA owner for the IRA owner’s file or a written statement from the IRA owner acknowledging the receipt of the statement.

3. Obtain IRA owner information, including name, address, and Social Security number.

4. Satisfy Customer Identification Program (CIP) requirements.

Amending1. Obtain the appropriately updated plan agreement (Forms 5305, 5305-A, 5305-R, 5305-RA, 5305-RB,

prototype, or forms provider IRA document) and disclosure statement, as necessary, for amending purposes.

2. Provide amendments to IRA owners.

3. Place a copy of each amendment in every IRA owner’s file or place a single copy of the amendment and accompanying cover letter in a master file with a complete list of the names of the IRA owners to whom the amendment was sent.

Contributions1. Accept deposits and verify the contribution type as well as the tax year for which the contribution is

made, when applicable, for reporting purposes.

2. Document the receipt of the contribution and the required elections using a designated form for the type of transaction (e.g., a contribution, rollover, transfer, recharacterization, or conversion form).

Distributions1. Have the IRA owner or beneficiary authorize the distribution by means of a written request or a

withdrawal form.

2. Document the distribution reason for reporting purposes.

3. If applicable, calculate the required minimum distribution (RMD) for the IRA owner.

4. When required, document the beneficiary’s payout election.

Origins of Compliance • 7

Federal Withholding1. Provide the IRA owner or beneficiary with a Form W-4P, Withholding Certificate for Pension or Annuity

Payments, or a qualifying substitute form before each distribution unless distributions are taken more frequently than quarterly. If distributions are taken more frequently than quarterly, the notice must be provided once per year at a reasonable time before the first distribution each year.

2. Retain a copy of each withholding election for the IRA owner’s file.

3. Remit withheld amounts to the IRS in a timely fashion as determined by a financial organization’s depositor status.

4. File Form 945, Annual Return of Withheld Federal Income Tax, and Form 945-A, Annual Record of Federal Tax Liability, (and Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, if required) with the IRS on an annual basis.

Reporting1. Provide each IRA owner (or beneficiary) with a fair market value statement by January 31 each year.

2. Provide IRA owners who are required to take RMDs with RMD statements by January 31 each year.

3. Provide a Form 1099-R by January 31 to each IRA owner or beneficiary that took a distribution in the preceding year.

4. If filing on paper, submit Forms 1099-R to the IRS by February 28 to report distributions in the preceding year. File Form 1096, Annual Summary and Transmittal of U.S. Information Returns, with Forms 1099-R if filing on paper. If filing electronically, submit Forms 1099-R by March 31.

5. Submit Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, electronically to the IRS and provide to the recipient (IRA owner or beneficiary) by March 15 to report nonresident alien distributions. Submit Form 1042 to the IRS if filing Forms 1042-S.

6. File Form 5498 with the IRS by May 31 for each IRA owner to report contributions, whether an RMD is required in the coming year, and the fair market value. Submit Form 1096 with Forms 5498 to the IRS if filing paper.

7. Send each IRA owner and beneficiary, if applicable, an account statement or Form 5498 by May 31 to report contributions made in the prior year as well as the IRA’s fair market value.

8. Submit corrected forms to the IRS and to the IRA owner or beneficiary as needed.

Fiduciary IRA administrators also may have certain responsibilities if they act as a fiduciary. In April 2016, the Department of Labor issued a final rule and related exemptions defining fiduciary status for purposes of investment advice with respect to IRAs and other retirement and savings arrangements. IRA administrators that become fiduciaries under the final rule generally will be subject to its compliance requirements. If an exemption does not apply, certain arrangements will result in prohibited transactions. (See “Final Fiduciary Rule”, in Chapter 7, Handling Legal Issues, for more information.)

8 • Origins of Compliance

IRA Owner Responsibilities

Taxpayers have certain responsibilities regarding the establishment, distribution, and reporting of IRAs. Sometimes, IRA administrators question whether they are obligated to assist IRA owners with some of these tasks. The following list clarifies the various responsibilities of IRA owners. As a demonstration of good customer service, most financial organizations use transaction forms that are designed to assist IRA owners with these responsibilities. Financial organizations should, however, direct IRA owners to see a competent tax advisor for specific questions about taxation and reporting.

IRA Establishment and Contributions1. Verify eligibility to establish an IRA and make regular contributions.

2. Provide the information that is necessary for reporting to the financial organization (name, Social Security number, etc.).

3. Submit customer information as required by the financial organization’s CIP.

4. Complete a beneficiary designation.

5. Provide a written irrevocable election if making a prior-year contribution.

6. Determine the eligibility for rollover, transfer, recharacterized, and conversion contributions.

7. Determine the deductibility of Traditional IRA contributions.

8. Correct excess contributions.

Distributions1. Provide a distribution request with a withholding election that includes the reason for the distribution.

2. If the financial organization extends an offer to calculate the RMD upon the request of the IRA owner rather than providing the RMD amount on the RMD statement, either request the RMD calculation from the financial organization or calculate the RMD.

3. Remove RMDs in a timely manner from Traditional IRAs.

Reporting and Penalty Taxes1. Report Traditional IRA contributions to the IRS on Form 1040, U.S. Individual Income Tax Return, and

Form 8606, Nondeductible IRAs (if applicable).

2. Record all distributions (taxable and nontaxable) on an individual federal income tax return. In addition, generally report all Roth IRA distributions, Roth IRA conversions, and partial recharacterizations on Form 8606, as well as any Traditional IRA distributions that include a return of basis (e.g., nondeductible contributions).

3. Remit penalties to the IRS along with Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, when required.

Opening an IRA • 9

Chapter 2

Opening an IRAOverview

Trustees, Custodians, and Issuers

IRA Opening Documents

Plan Agreement Contents

IRA Disclosure Statements

Customer Identification Program Requirements

Plan Agreement and Disclosure Statement Amendments

Beneficiary Designations

IRA Contribution Information

IRA Opening Documents Log Sheet

Overview

IRA compliance becomes important the moment an IRA is established. To ensure compliance, the financial organization must provide correct and current opening documents to the individual establishing the IRA.

Trustees, Custodians, and Issuers

IRA opening documents may differ by financial organization. IR accounts (IRC Sec. 408(a) and (h)) are IRAs established as trust or custodial accounts. A trustee or custodian holds the IRA assets under a plan agreement for the benefit of the IRA owner. The Traditional IR account opening document (i.e., the plan agreement) may be an IRS model Form 5305, Traditional Individual Retirement Trust Account, an IRS model Form 5305-A, Traditional Individual Retirement Custodial Account, or a prototype plan. The Roth IR account opening document (i.e., plan agreement) may be an IRS model Form 5305-R, Roth Individual Retirement Trust Account, an IRS model Form 5305-RA, Roth Individual Retirement Custodial Account, or a prototype plan. Forms providers, like Ascensus, often have specifically designed versions of these documents with added features or added explanations available to financial organizations.

10 • Opening an IRA

IR annuities (IRC Sec. 408(b)) are established through insurance companies. Insurance companies are “issuers” of IR annuities and they generally hold the IRA assets in annuities. The Traditional IR annuity opening document is referred to as an “endorsement,” and must be a prototype document. The endorsement, along with a state-approved insurance contract together make up the opening document. The Roth IR annuity opening document may be either an IRS model Form 5305-RB, Roth Individual Retirement Annuity Endorsement, with an annuity contract, or a prototype document with an annuity contract. IR accounts and annuities both operate under federal laws and applicable regulations, but there are some differences.

Trustee vs. CustodianWhat is the difference between a trustee and a custodian? The term “custodian” implies an entity whose role regarding the IRA is merely passive, meaning the organization takes title to the property and always acts upon the IRA owner’s direction. A financial organization that serves as a “trustee” may or may not have a passive role with respect to the IRAs it offers. If the organization does not have full trust powers under applicable state or federal laws, its role essentially is the same as a custodian’s. In some situations, a financial organization with full trust powers may offer “managed accounts” to IRA owners, for which the IRA trustee may choose to make investment decisions for the IRA and to allow a broader range of investment options within the IRA. But most financial organizations, even those with full trust powers, act as custodians. Trustees and custodians should check with their legal counsel if they are unsure about whether they should offer IRAs as a trustee or as a custodian.

The type of authority that a financial organization has will dictate the type of document it may use. Financial organizations with full trust powers may use IRS Form 5305 for Traditional IRAs or Form 5305-R for Roth IRAs (or a trustee IRA document from a forms provider). If a financial organization acts as a custodian, it may use Form 5305-A for Traditional IRAs or Form 5305-RA for Roth IRAs (or a custodial IRA document from a forms provider).

Regardless of whether a financial organization serves as a custodian or has trust powers, it has certain obligations as an IRA trustee or custodian as stated in tax laws and regulations. For example, both trustees and custodians have a duty to report, to withhold, and to provide an up-to-date plan agreement and disclosure statement to the IRA owner.

Nonbank Trustees and CustodiansAn entity not described as a bank (under IRC Sec. 408(n)) may be eligible to act as an IRA trustee or custodian if the IRS grants nonbank trustee or custodian powers to the entity. Rev. Proc. 2018-4 indicates that an entity applying for nonbank trustee or custodian powers must submit a written application to the IRS that demonstrates how the applicant intends to comply with the requirements of Treasury Regulation (Treas. Reg.) 1.408–2(e)(2) through (5), which defines some of the responsibilities of a nonbank trustee. An applicant must identify the specific accounts (e.g., Traditional or Roth IRAs) for which the entity desires to serve as a nonbank trustee or custodian.

Once approved, the nonbank trustee or custodian has the same obligations as stated in tax laws and regulations for IRAs administered by bank trustees and custodians (e.g., duty to report, to withhold, to provide up-to-date plan agreements and disclosure statements). A copy of the nonbank trustee/custodian approval letter must be given to IRA owners when they establish IRAs.

Opening an IRA • 11

IssuersInsurance companies are “issuers” of IR annuities. Like depository institutions and brokerage firms offering IR accounts, all insurance companies offering IR annuities must follow the federal laws and regulations, but state laws also play a role.

IR Account vs. IR AnnuityThe distinctions regarding the type of organization and whether it offers IR accounts or IR annuities are not absolute. For example, some depository organizations may have a licensed insurance agent available, and thus can offer IR annuities. Any concerns regarding whether an organization may offer IR accounts or IR annuities should be directed toward that organization’s legal counsel.

Although the terminology between IR accounts and IR annuities differs and certain characteristics are intrinsic to one or the other type of document, the requirements are essentially the same from a compliance perspective.

NOTE: When this manual refers to the plan agreement, the term includes IR accounts and IR annuities unless specifically noted otherwise.

Specific differences in terminology stem from the type of organization holding the governing instrument. As mentioned, IR annuities generally are set up as IRA endorsements with state contracts through an insurance company, and IR accounts are set up as trust or custodial accounts at financial organizations. Understanding the terminology distinctions between the two products will be helpful in understanding IRA compliance. Some common terms for each product and their definitions are as follows.

Terminology Differences

INDIVIDUAL RETIREMENT ACCOUNTS INDIVIDUAL RETIREMENT ANNUITIES

Trustee or Custodian – the financial organization maintaining the IR account

Issuer – the insurance company offering the IR annuity

IRA Owner, Grantor, Depositor – the individual who establishes the IR account

Annuitant – the individual who is entitled to receive benefits from the IR annuity

Trust Instrument (plan agreement) – the governing instrument for the IR account

Endorsement – the governing instrument along with the annuity contract for the IR annuity

Contribution – the individual’s deposit to the IR account

Premium – the annuitant’s deposit to the IR annuity

Account Value – the accumulated assets in the IR account

Cash Surrender Value – the accumulated assets in the IR annuity after certain adjustments

Distributions – withdrawals from the IR account

Annuity Payments – payouts from the IR annuity

12 • Opening an IRA

IRA Opening Documents

To open a Traditional or Roth IRA, financial organizations must use IRA opening documents (i.e., plan agreements or IRA endorsements with annuity contracts) and disclosure statements that include financial disclosures. IRA administrators also often have the individuals sign beneficiary designations and contribution forms (if a contribution is being made) when opening IRAs.

The IRA plan agreement (or the application) is signed by the IRA owner and becomes the contract between the individual and the financial organization. In effect, the IRA plan agreement creates the IRA because without a signed agreement, the IRA does not exist.

The plan agreement contains the responsibilities of both the IRA owner and the financial organization.

Traditional IRAsAs previously noted, financial organizations can use government model forms or prototype plan agreements to open IRAs. Forms providers, like Ascensus, also may have available customized forms or forms kits (based on the IRS model documents or prototype documents) that also include the required disclosure statements.

IRS Model Forms 5305 and 5305-AIRA trustees and custodians may use the IRS model Form 5305 (trustees) or 5305-A (custodians) to offer Traditional IRAs. The IRS periodically updates these forms for law changes and IRS pronouncements. The latest revised Forms 5305 and 5305-A were released in September 2017, and carry an April 2017 revision date.

Forms 5305 and 5305-A or specially designed documents generally based off the IRS forms are used by most financial organizations as their plan agreements because they are the easiest to maintain. The IRS does not have a model form for Traditional IRA annuities, but does for Roth IRA annuities (Form 5305-RB).

The IRS model Traditional IRA forms include Articles I-VII with space provided for additional language to be included in Article VIII. Forms suppliers generating these plan agreements often customize Article VIII language to include special provisions, such as the right to charge fees, procedures for resignation of the trustee or custodian, and IRA investment restrictions. Except for Article VIII, the language of Forms 5305 and 5305-A usually will remain as the IRS drafted it. Articles I-III may not be altered in any way.

Prototype Plan AgreementSome financial organizations use a prototype plan agreement to offer IRAs. An IRA prototype generally is drafted by an attorney according to specific IRS guidelines and submitted to the IRS with IRS Form 5306, Application for Approval of Prototype or Employer Sponsored Individual Retirement Arrangement (IRA), for approval. Prototype documents generally are based on sample language drafted by the IRS, called a Listing of Required Modifications (LRMs). The LRM language may be modified slightly for prototype documents as long as all LRM topics are incorporated. The prototype often includes provisions giving the plan more flexibility than the IRS model agreements. The contents of an IRA prototype, however, are still bound by many of the standard requirements of Forms 5305 and 5305-A.

Financial organizations that apply for and receive IRS approval for the prototype document will receive opinion letters from the IRS. Financial organizations must provide individuals who establish IRAs with a copy of the opinion letter along with the other required documents.

Opening an IRA • 13

IR AnnuitiesInsurance companies issuing Traditional IR annuities also are bound by the general IRA requirements. As noted earlier, Traditional IR annuities currently can be opened only by using a prototype IRA endorsement. The prototype endorsement is coupled with an annuity (i.e., insurance) contract from the issuer to establish an IR annuity. IR annuity prototypes do not have to be submitted to or approved by the IRS, although an IRS submission is strongly recommended (using Form 5306).

A financial organization that offers IR annuities also must submit the IRA documentation to each state’s insurance commissioner for approval. IR annuity contracts must be state approved. Because insurance is a state-regulated product, an insurance provider can only sell its products, including IR annuities, within a state with the approval of the proper state insurance commissioner. Each state has the authority to set its own insurance standards. Each provider that seeks to operate in that state submits the proposed contract language to obtain approval to provide the product (e.g., IR annuity) in that state.

Roth IRAsFinancial organizations can use government model or prototype plan agreements to establish Roth IRAs. Forms providers also may have available customized forms or forms kits (based on the IRS model documents or prototype documents) that also include the required disclosure statements.

IRS Model Forms 5305-R, 5305-RA, and 5305-RBThe IRS offers model Roth IRA Forms 5305-R and 5305-RA that may be used to establish Roth IR accounts. The model forms are similar in content and form to the model IRS forms for establishing Traditional IRAs. The IRS also provides Form 5305-RB that may be used to establish Roth IR annuities. The latest revisions of these Roth IRA model forms were released in September 2017 and carry an April 2017 revision date.

According to the instructions to the model forms, a financial organization may make certain amendments to the provisions of the Roth IRA model forms in Article IX. For example, according to IRS Notice 98-49, a financial organization may amend the model forms to give a surviving spouse, who is the sole beneficiary of a Roth IRA, the option of not treating the Roth IRA as his own following the Roth IRA owner’s death. Roth IRAs generally have the same opening document requirements as Traditional IRAs (i.e., a plan agreement, disclosure statement, and financial disclosure).

Prototype DocumentsAs is the case with Traditional IRAs, financial organizations also may use Roth IRA prototype documents to establish Roth IRAs. Announcement 97-122 provides key guidance on prototype Roth IRA document issues. In addition, Rev. Proc. 98-59 (modified by Rev. Proc. 2010-48) contains the application procedures for obtaining IRS opinion letters for prototype Roth IRA documents.

The IRS prototype program accepts combination Traditional IRA/Roth IRA documents. Traditional IRA and Roth IRA assets may not be commingled in the same trust, however, so the document must clearly indicate whether the IRA that is being established is a Traditional or a Roth IRA. The IRS does not offer model Traditional IRA/Roth IRA combination forms.

Roth IR AnnuitiesFinancial organizations issuing Roth IR annuities have three document options: the IRS model Form 5305-RB, a prototype document, or a specially designed document from a forms provider (i.e., the endorsement). The endorsement is coupled with an annuity contract offered by the issuer.

14 • Opening an IRA

Inherited IRA Plan DocumentsThe Pension Protection Act of 2006 (PPA) provides that, effective January 1, 2007, beneficiaries of participants in eligible employer-sponsored retirement plans may directly roll over inherited plan assets to IRAs as long as the IRAs are established and maintained as “inherited” IRAs (IRC Sec. 402(c)(11), Notice 2008-30, Notice 2009-68). The Worker, Retiree, and Employer Recovery Act of 2008 required employer-sponsored retirement plans to begin offering this option for plan years beginning on or after January 1, 2010. Eligible retirement plans include qualified retirement plans under IRC Sec. 401(a), qualified annuity plans under 403(a), 403(b) plans, governmental 457(b) plans, and the U.S. government’s Thrift Savings Plan (TSP). Beneficiaries whose inherited 401(k), 403(b), governmental 457(b), or TSP accounts include designated Roth account assets may roll over the designated Roth assets to inherited Roth IRAs, but not to inherited Traditional IRAs. The government’s TSP began offering the designated Roth contribution option in 2012.

While spouse beneficiaries may roll over retirement plan assets to their own IRAs, they may also elect to directly or indirectly roll over the inherited assets to “inherited” IRAs. Unlike spouse beneficiaries, however, nonspouse beneficiaries may not directly or indirectly roll over inherited retirement plan assets to their own IRAs (i.e., IRAs not treated as inherited IRAs).

Little guidance has been issued regarding how inherited IRAs should be established. The IRS has informed Ascensus that it is not issuing specific model plan agreements for inherited IRAs. Ascensus recommends that financial organizations provide beneficiaries with plan agreements, disclosure statements, and financial disclosures upon establishing the inherited IRAs. Some forms providers, like Ascensus, may have specific “inherited IRA” plan documents available.

The IRS issued Notice 2007-7 to address certain PPA provisions. Notice 2007-7, Q&A 13, indicates that an inherited IRA must be established to identify both the nonspouse beneficiary and the deceased retirement plan participant, such as “Tom Smith as beneficiary of John Smith.” It also clarifies that a trust named as the beneficiary of a deceased retirement plan participant may complete a direct rollover to an IRA as long as the beneficiaries of the trust are “individuals” (i.e., persons). The inherited IRA must be established to identify the trust and the deceased retirement plan participant. (See Chapter 6, Miscellaneous Compliance Concerns, for more information on trust beneficiaries.)

Plan Agreement Contents

Every IRA professional should be familiar with the contents of the IRA plan agreement. The plan agreement lists the responsibilities of the IRA owner and the IRA trustee, custodian, or issuer (also referred to in this manual as the financial organization). Although the form of the opening document may vary depending on the type of IRA (Traditional or Roth) and on what version of the form the financial organization selects, the requirements generally are the same. To illustrate what provisions are found in a plan agreement, a summary of the contents of IRS Forms 5305 and 5305-A for Traditional IRAs follows.

Article IThe financial organization agrees not to accept more than the maximum annual amount ($5,500 for 2017 and for 2018, plus catch-up contributions, if eligible) in cash IRA contributions from an IRA owner for any tax year. The only exceptions are rollover, transfer, or simplified employee pension (SEP) contributions.

NOTE: The annual contribution limit applies in aggregate to all Traditional IRA and Roth IRA contributions made for a tax year. (IRC Sec. 408A(c)(2)).

Opening an IRA • 15

Article IIThe IRA owner’s interest in the IRA is nonforfeitable. The IRA owner has a right to all the IRA assets at any time as long as she is willing to pay any applicable taxes and penalties associated with the withdrawal.

Article IIICertain types of investments may not be held within an IRA. IRA assets may not be invested in life insurance contracts. IRA assets may not be commingled with any other property except in a common trust fund or a common investment fund within the meaning of IRC Sec. 408(a)(5).

IRA assets may not be invested in collectibles such as antiques, art, gold, silver, wines, etc. As a result of the Tax Reform Act of 1986, however, IRA owners are permitted to invest in certain gold and silver coins minted in the U.S. after 1985. Under the Technical and Miscellaneous Revenue Act of 1988, IRA owners also may invest in certain state issued coins. Under the Taxpayer Relief Act of 1997, effective January 1, 1998, certain platinum coins and certain gold, silver, platinum, or palladium bullion are allowed as an IRA investment as long as the bullion or coin(s) is in the possession of the financial organization (IRC Sec. 408(m)(3)).

Article IVIRA distributions must be made according to Internal Revenue Code requirements and final Treasury regulations once an IRA owner reaches his 70½ year. These required minimum distributions (RMDs) must begin by the IRA owner’s required beginning date of April 1 of the year following the IRA owner’s 70½ year. Article IV provides the formula for determining RMD amounts and lists the options an IRA owner has for taking these distributions.

An IRA owner who has two or more IRA plans may satisfy her RMD requirement by taking from one IRA the amount required to satisfy the RMD from another IRA.

Article IV also lists the options available to IRA beneficiaries upon the death of the IRA owner. These options also may be addressed in Article VIII.

Article VThe IRA owner agrees to supply the financial organization with the necessary information for reporting transactions to the IRS. The financial organization then agrees to do the required reporting.

Article VIArticles I through III of the plan agreement are the controlling articles in the IRA plan agreement.

Article VIIThe financial organization agrees to keep the plan agreement current by amending the plan agreement for law changes.

Article VIIIThe IRS does not draft Article VIII language for Forms 5305 and 5305-A (article IX in the Roth IRA model documents). Article VIII in these forms is left blank to allow the financial organization to add any provisions that comply with state law and the Internal Revenue Code. The IRS notes under Article VIII that the added language cannot imply that it has been reviewed or approved by the IRS.

16 • Opening an IRA

Fewer and fewer financial organizations feel the need to offer a prototype IRA because of the great flexibility offered by Article VIII. In the instructions to the model Forms 5305 and 5305-A, the IRS provides examples of some of the provisions that may be addressed in Article VIII or subsequent articles (all referred to as Article VIII in this discussion). Adding Article VIII language, while recommended, is not mandatory.

DefinitionsArticle VIII frequently begins with a list of definitions of the terms used in the section.

Investment PowersThe financial organization may add a provision to Article VIII enumerating the types of investments the financial organization will permit as IRA investments. Article VIII can include language granting the trustee or custodian specific powers necessary to manage the investments within the IRA or language giving the IRA owner exclusive control over investments.

Voting RightsIf a financial organization holds securities, it may wish to enter into a separate agreement with the IRA owner as to who will exercise voting rights for the stock.

Exculpatory ProvisionsThe financial organization may wish to state in Article VIII that it will rely on all information provided by the IRA owner and that any consequences resulting from doing so will be borne by the IRA owner. For instance, if an IRS report is incorrectly filed because of erroneous data provided by the IRA owner, the financial organization should not bear the expense of any fines relating to that incorrect report.

Another area of liability frequently addressed in Article VIII is the responsibility for investment performance. The financial organization typically is not responsible for the investment performance of the assets held by the IRA. Particularly where the IRA owners are allowed to self-direct or select their own investments, Article VIII should be enhanced to clarify that the financial organization will not be liable for the performance of investments selected by the IRA owner.

Amendment and TerminationArticle VIII may include language on how the plan will be amended and how either the IRA owner or the financial organization may terminate the agreement.

Removal of TrusteeA financial organization may, for various reasons, wish to resign as the trustee or custodian of an IRA. Conversely, an IRA owner may wish to remove a current trustee or custodian. (This operation generally is handled as a transfer or rollover.) Article VIII may contain a provision establishing both the financial organization’s and the IRA owner’s right to terminate the relationship at any time and also delineating the method of termination.

Trustee’s FeesMost financial organizations want the ability to initiate new fees and penalties, should it be necessary, after the IRA is opened. The procedures for introducing new fees could be addressed in Article VIII. For example, a financial organization could add language allowing additional fees (not described in the financial disclosure) to be imposed following 30 days notice to the IRA owner.

Opening an IRA • 17

Some plan agreements also add language permitting the financial organization to remove assets from the IRA to satisfy fees, including the liquidation of certain assets if cash is not available within the IRA.

State Law RequirementsState law also may affect IRAs. The financial organization may list specific laws that could affect the IRA owner’s maintenance of the IRA.

DistributionsA financial organization that wishes to modify the Article IV language governing distributions may do so in Article VIII.

Accepting Only CashFinancial organizations offering self-directed IRAs may wish to clarify the Article I requirement that only cash contributions will be accepted into the IRA except in the case of a rollover or transfer. The trustee generally will then purchase the investment for the IRA trust.

Excess Contribution TreatmentThe consequences of making excess contributions usually are handled in the IRA disclosure statement. But if the financial organization wishes to clarify its own procedure, the procedure may be explained in Article VIII.

Prohibited Transactions With the IRA ownerAlthough prohibited transactions are explained in the disclosure statement, information on the financial organization’s responsibility when an IRA prohibited transaction occurs may be described in Article VIII.

Most forms providers will draft extensive Article VIII language to assist the financial organizations that use their forms. This language will vary from provider to provider. Financial organizations should carefully check the Article VIII provisions to make sure the language meets their needs and does not mandate procedures that they are not prepared to follow.

Proof of Plan Agreement ReceiptThe IRS requires that an IRA owner receive a written document containing the terms and conditions of the plan agreement. The IRS may assess a monetary fine against the financial organization if it cannot offer proof that the IRA owner (either Traditional or Roth) received the plan agreement. The Internal Revenue Code states that a $50 penalty applies for each failure to provide a plan agreement (IRC Sec. 6693(a), Treas. Reg. 1.408-6(d)(4)(ix)).

To prove that the IRA owner received the document, the financial organization should have the IRA owner sign and date a copy of the plan agreement or an acknowledgment that he received a copy of the plan agreement. Often the acknowledgment is found as part of the signature section on the IRA application. The financial organization should retain the signed copy or acknowledgment in the IRA owner’s file as the required proof.

See “Electronic Signature” in Chapter 3, IRA Withholding, for laws regarding electronic signatures.

18 • Opening an IRA

Nonbank Trustee or Custodian Approval LetterWhen an entity is approved as a nonbank trustee or custodian, it will receive written notice of approval from the IRS that will specify the day on which approval is effective. The entity must not serve as a trustee or custodian before the effective date and cannot serve as an IRA trustee or custodian unless it has provided the IRA owner with a copy of the approval letter (Treas. Reg. 1.408-2(e)(7)(iii)). The approval letter, therefore, must be provided to the IRA owner on or before the IRA plan agreement is signed by the IRA owner and the trustee/custodian.

IRA Disclosure Statements

Each individual opening an IRA (either Traditional or Roth) must receive a disclosure statement in addition to the plan agreement. The disclosure statement consists of two parts: a nontechnical explanation of the IRA rules and a financial disclosure. Disclosure statement (and financial disclosure) requirements similar to those that apply to Traditional IRAs also apply to Roth IRAs.

Disclosure Statement Contents Treas. Reg. 1.408-6(d)(4)(iii) specifies the information that must be contained in a disclosure. Some of the key items that a disclosure statement must contain include the following.

• An explanation of the statutory requirements that pertain to an IRA

• An explanation of the tax consequences of establishing an IRA, including the deductibility of contributions, the tax treatment of distributions, the availability of income tax-free rollovers, and the tax status of IRAs

• An explanation of the limitations and restrictions on some IRA contributions

• An explanation of the circumstances under which an IRA owner may revoke the IRA

• A statement that a prohibited transaction will cause an IRA to lose its tax exemption, which results in the untaxed funds being included in gross income

• A statement that all or any portion of an IRA that is used as security for a loan is considered to be distributed, and that untaxed amounts are taxable in the year of distribution

• Statements explaining the reasons for and results of the early distribution, excess contribution, and excess accumulation penalties

• A statement explaining distributions, including required minimum distributions

Right of RevocationBoth Roth and Traditional IRA owners generally must have the right to revoke a newly established IRA plan for seven calendar days following receipt of the IRA disclosure statement. The intent of the right of revocation is to give IRA owners time to compare IRAs offered through various financial organizations, as well as time to review the IRA provisions. A financial organization must distribute the disclosure statement to the IRA owner on or before the establishment of the IRA.

If the financial organization distributes the disclosure statement within seven days before the establishment of the IRA, the financial organization must permit the IRA owner to revoke the IRA for a period of seven days following the date of establishment (Treas. Reg. 1.408-6(d)(4)(ii)(A)(2)). The method of revocation, either written, oral, or both, must be described in the disclosure statement.

Opening an IRA • 19

See Chapter 4, IRA Reporting, for information on how to report IRA revocations.

IRA Owner Must Follow Proper Notice Procedures – If an individual revokes her IRA, she must notify the financial organization according to the procedures outlined in the disclosure statement. This information must be prominently displayed at the beginning of the disclosure statement. The disclosure statement will note whether the revocation must be written, delivered orally, or whether both written and oral notices are required. If a written notice is mailed, the procedure must note that it will be deemed mailed on the date of the postmark provided that the notice was properly mailed. If an oral notice is used, the procedure must permit a telephone call during business hours.

Entire Contribution Must Be Returned – Once the individual revokes the IRA using the proper procedures, he is entitled to a return of the entire contribution amount used to open the IRA. No adjustments may be made for sales commissions, administrative expenses, fluctuations in market value, etc. But a financial organization may establish a policy of returning earnings on a revoked IRA.

The IRA Financial DisclosureThe financial disclosure is an essential part of the disclosure statement and must reflect specific IRS assumptions (Treas. Reg. 1.408-6(d)(4)(v), (vi) and (vii)). Financial organizations have been fined by the IRS for providing improper financial projection information or for providing no information at all. The financial projections required by the IRS combine actual investment information with hypothetical assumptions. This projection informs IRA owners of the IRA’s projected growth, based on certain assumptions, and of any fees that may be charged or penalties that may be assessed against the IRA.

Financial Disclosure PurposeThe financial disclosure is completed when an IRA (either Traditional or Roth) initially is opened and is intended to be a consumer information device. Once the financial organization has entered the required information, the individual, ideally, may take the financial disclosure to compare to other financial organization’s fees and penalties and to secure the best investment for her IRA dollars.

Financial Disclosures When Growth Can Be ProjectedTo make the comparison between financial organizations’ IRAs easier for an individual, the IRS, in the Treasury regulations and Revenue Ruling 86-78, lists certain assumptions that must be used in every financial disclosure where (1) certain amounts are guaranteed over time, or (2) where a projection of growth in the IRA’s value can reasonably be made. If financial organizations can reasonably project the growth of the IRA assets, the assumptions for the financial disclosure are as follows.

• Contribution – When an individual establishes an IRA with a regular, spousal, or SEP contribution, the financial projection is based on an assumption that the IRA owner will make an annual $1,000 deposit on the first day of each year, regardless of the actual contribution made. When an individual establishes an IRA with a rollover or transfer contribution, the financial projection is based on an assumption that the IRA owner will make a one-time, $1,000 deposit on the first day of the year in which the contribution actually is made.

• Age Used – Financial organizations should base the financial disclosure on the age the IRA owner will attain in the year the disclosure is being completed.

• Investment Instrument – Use the type of investment instrument selected by the IRA owner.

• Term of Certificate – If a time deposit is the selected investment, use the actual length of the time deposit in projecting any loss of earnings penalty.

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• Interest Rate – Use an interest rate no greater than that which is currently in effect. The interest rate must remain the same for the entire projection.

• Compounding Method – Use the actual or a less frequent compounding method, if applicable.

• Loss of Earnings Penalty or Fee – Show the account value for each of the projected years, taking into consideration any applicable loss of earnings penalty or other fee that the financial organization would assess if the IRA owner received a distribution at the end of the year for which the projection is being made.

• First Five Years – Show the IRA’s value at the end of each of the first five years during which contributions are to be made.

• Account Value at Ages 60, 65, and 70 – Show the IRA’s value at the end of the years in which the IRA owner will attain ages 60, 65, and 70.

Financial Disclosures When Growth Cannot Be Projected – When an IRA owner chooses mutual funds, stocks, bonds, certain variable annuities, or similar investments as the initial investments within an IRA, an accurate earnings projection is not possible. Because the growth for these types of IRAs cannot be reasonably projected, these financial disclosures have different requirements.

• Give a general description of the investments associated with this type of IRA.

• Give a general description of the fees that the financial organization may apply to the IRA.

• Give a general description of how the financial organization computes the earnings on the available investments, including a statement that the IRA’s growth in value is neither guaranteed nor projected.

• Provide any other information that may aid the IRA owner, including all other investment information. This information must include any relationship between the financial organization and an affiliated brokerage firm, and the procedures to request an investment transaction.

Financial Disclosures for IR Annuities – An IR annuity can be invested in certain underlying investments allowed under the annuity contract. And depending on the type of annuity, different requirements apply for providing the financial disclosure. With a fixed annuity, the annuitant must receive a completed financial disclosure using the method when growth can be projected or when it cannot, as applicable. But with a variable annuity, financial organizations must provide a financial disclosure generally based on when the growth cannot reasonably be projected.

A fixed annuity earns interest at a rate determined by the insurance company or as described in the annuity contract. The initial rate of return is described and determined under the terms of the annuity contract. If the annual renewal rate differs from the initial guaranteed rate of interest, the renewal rate is either determined by the insurance company or described in the annuity contract. With a fixed annuity contract, the insurance company always agrees to pay a minimum guaranteed rate of return for the life of the contract.

With a variable annuity, the annuitant determines how the IR annuity assets are invested from a list of fund choices (sub-accounts) determined by the insurance company (like a mutual fund). Fund choices may range from fairly conservative funds to aggressive stock funds. It is a securities investment and, unlike a fixed annuity, there is no guaranteed rate of return. The account value can increase or decrease based on the performance of the investment funds selected under a particular contract.

Opening an IRA • 21

Proof of Disclosure Statement ReceiptAs described, the content of the entire disclosure statement and when the disclosure statement must be provided is specified in the Treasury regulations. The financial organization must be able to prove that an IRA owner has received a copy of the disclosure statement (including both the nontechnical explanation of the IRA rules and the financial projection) or be subject to a $50 per failure penalty (IRC Sec. 6693(a), Treas. Reg. 1.408-6(d)(4)(ix)).

To prove an IRA owner received a copy of the disclosure statement, the IRA administrator should have the IRA owner sign and date a copy of the statement and keep it in the IRA owner’s file. Alternatively, the IRA owner may sign a statement acknowledging receipt of the disclosure statement. This acknowledgment often is a part of the IRA application. When an individual acknowledges receiving the disclosure statement, the acknowledgment usually includes the financial disclosure.

Customer Identification Program Requirements

In 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required To Intercept and Obstruct Terrorism (USA PATRIOT) Act was signed into law. This law required financial organizations to implement a customer identification program (CIP) by October 1, 2003.

For the purposes of CIP creation, “account” means a formal financial relationship established to provide or engage in services, dealings, or other financial transactions including a deposit account, a transaction or asset account, a credit account, or other extension of credit. The definition of account includes IRAs (including Traditional and Roth IRAs), Coverdell education savings accounts, Archer medical savings accounts, and health savings accounts, but does not cover retirement plans subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA).

“Customer” means a person who opens a new account and also a person that opens a new account for an individual who lacks legal capacity (e.g., a minor). Customer does not include a person who has an existing account with the bank, provided that the bank has a reasonable belief that it knows the person’s true identity.

Minimum CIP RequirementsA financial organization’s CIP must be outlined in a written document. The CIP must contain procedures for opening an account that specify the identifying information that will be obtained from each customer. As a minimum, the following information must be obtained before opening an account.

• Name

• Date of birth

• Address

• Identification number

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VerificationThe CIP must contain procedures for verifying the customer’s identity using the obtained information previously noted. Customer verification under the CIP procedures can be accomplished with documents, nondocumentary methods, or through a combination of both. If verification is done through documents, the CIP must contain procedures stating which documents that the financial organization will use for customer verification. These documents may include (for an individual) unexpired government-issued identification showing nationality or residence and a photo or similar safeguard (e.g., driver’s license or passport).

RecordkeepingThe CIP must include procedures for making and maintaining a record of all information obtained under the required procedures. At a minimum, the record must include

• all identifying information about a customer obtained from the customer;

• a description (not an actual copy) of any document that was relied upon in the verification of documents stage (noting the document type, any identification number contained in the document, place of issuance and, if applicable, the date of issuance and expiration date);

• if applicable, a description of the methods and results of any measures undertaken to identify the identity through nondocumentary means or additional means (as set forth in the regulations); and

• if applicable, a description of the resolution of any substantive discrepancy discovered when verifying the identifying information obtained.

NoticeThe CIP must include procedures for providing customers with adequate notice that the financial organization is requesting information to verify their identities. Notice is adequate if the financial organization generally describes the identification requirements and provides the notice in a manner that is reasonably designed to ensure that the customer is able to view it before opening an account. Some examples are to post the notice in a lobby or on a website, to include the notice on account applications, or to give the notice orally.

How IRAs Fit Into a CIPA financial organization needs to include IRAs in its CIP. Financial organizations should

• obtain adequate information before opening an IRA,

• verify the customer’s identity when opening an IRA,

• make and maintain a record of the information obtained under the organization’s CIP procedures, and

• provide adequate notice that the information being obtained is to verify the customer’s identity.

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Plan Agreement and Disclosure Statement Amendments

The IRA plan agreement and disclosure statement both incorporate IRA rules and regulations mandated by Congress or by the IRS. When new IRA laws are enacted, the plan agreement, disclosure statement, or both may need to be amended to bring the IRA into compliance with the new rules.

Financial organizations are responsible for amending the IRA (Treas. Reg. 1.408-6(d)(4)(ii)). If the financial organization does not provide the IRA amendment in a timely manner, a penalty of $50 per failure may be assessed.

The IRS has established general guidelines for making timely amendments. According to Treas. Reg. 1.408-(6)(d)(4), IRA owners should receive a copy of any amendments within 30 days of the later of the date on which the amendment is adopted or the date upon which the amendment becomes effective. Financial organizations using the IRS model plan agreements (e.g., IRS Form 5305 or 5305-A), however, may wait until the IRS releases revised versions before making amendments. The IRS often issues notification of amendment deadlines. These dates may offer an amendment period longer than the regulation prescribes.

Plan Agreement AmendmentsProcedures for amending plan agreements differ depending upon whether a financial organization uses documents based on the IRS model forms (Forms 5305, 5305-A, 5305-R, 5305-RA, or 5305-RB) or prototype documents. Many financial organizations use IRA opening documents purchased from a forms provider, such as Ascensus. Often forms providers will use the IRS model forms (Articles I-VII for Traditional IRAs and Articles I-VIII for Roth IRAs) as the basis for the plan agreement and draft special language for Article VIII (or Article IX for Roth IRAs). Forms providers typically will direct financial organizations using these plan agreements to amend when the IRS revises the model forms. The IRS usually will inform the public of the due date by which the IRA plan agreements must be amended, if required, when it releases a revised model form.

Some financial organizations may choose to have IRA plan agreements drafted in their entirety and submitted to the IRS for approval as a prototype document. The IRS typically provides these financial organizations with model amendment language in the form of Listing of Required Modifications (LRMs) to amend prototype IRA plan agreements for major law changes and IRS pronouncements. IRA document providers use the LRMs to update their prototype documents and guide financial organizations through the amendment process.

Recent Plan Agreement AmendmentsThe last time the IRS required amendments for IRA plan agreements that are based on IRS model forms was in 2002. The IRS released new model IRA trustee and custodial plan agreements in September 2017 that carry a revision date of April 2017. In addition to minor clarifications, the updated forms include a new account number field and more current contribution and eligibility dollar limits. The IRS informed Ascensus that it would not release specific guidance for amending IRA documents for these latest revisions.

Along with model document amendments, the IRS required amendments to prototype documents in 2002 as well. Prototype plan agreements also have been updated more recently—in 2007 and in 2010—because of IRS updates to LRMs for recent law changes and IRS pronouncements.

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2010 Prototype Document Amendments – In 2010, the IRS released new Traditional and Roth IRA LRMs and Rev. Proc. 2010-48, which contains guidance on updating prototype documents with the new LRM language. New language was added to the LRMs for miscellaneous changes since 2002, including information on inherited IRAs, retirement plan rollovers to Roth IRAs, military death gratuity payment rollovers to Roth IRAs, recontributions by qualified reservists and for federally-declared disasters, and Exxon Valdez litigation payments.

The IRS stated in Rev. Proc. 2010-48 that if a prototype document was amended using only the LRM language, no new opinion letters were required. But if a prototype sponsor applied for a favorable opinion letter, the prototype documents had to include language that addressed every applicable issue contained in the LRMs. Ascensus recommended that prototype documents be amended for the new LRMs to keep the IRS documents up to date.

2007 Amendments for Prototype Documents – The IRS required amending of Roth IRA prototype plan agreements in 2007 following a June 2007 release of updated Roth IRA LRMs, which included a number of changes related to the Pension Protection Act of 2006 (PPA). IRS Announcement 2007-55 required that prototype documents be amended to accept rollovers of designated Roth accounts from IRC Sec. 401(k) and 403(b) plans if the prototype documents did not already provide for them. If a prototype document was amended using the LRM language, no new opinion letters were required. An updated LRM for Traditional IRAs was also released in June 2007 and contained various PPA changes. An IRS official commented to Ascensus that prototype Traditional IRA plan agreements also should be amended to be in compliance with PPA.

2002 Prototype Document Amendments – Financial organizations sponsoring prototype IRA documents were required to update their documents for changes brought about by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the Job Creation and Worker Assistance Act of 2002, and the RMD regulations. The IRS released sample IRA plan language for prototypes (i.e., LRMs) early in 2002. Under Rev. Proc. 2002-10, financial organizations were required to update their prototype documents. Although not required, financial organizations were encouraged to submit them to the IRS for new opinion letters by December 31, 2002.

2002 Required Amendments for IRS Model Plan Agreements – In April of 2002, the IRS released new versions of Forms 5305 and 5305-A, 5305-R, 5305-RA, and 5305-RB, which carried a March 2002 revision date. The forms were updated to incorporate changes brought about by EGTRRA, the Job Creation and Worker Assistance Act of 2002 (technical corrections to EGTRRA), and the final required minimum distribution (RMD) regulations (Treas. Reg. 1.401(a)(9) and 1.408-8). The IRS required amending of current IRA documents for existing IRAs as well as newly established IRAs. The IRS announced the amending requirements in Rev. Proc. 2002-10.

Plan Agreement Amendment ProceduresFor IR account plan agreements, once the amendment language is available, the financial organization may choose to amend using one of two methods.

1. The financial organization may (if state law and the IRS allow) send out a copy of the amendment to each existing IRA owner. The amendment typically will be accompanied by a cover letter explaining that if the financial organization does not hear from the IRA owner within a certain amount of time, the amendment will take effect. This method generally is referred to as “negative consent.”

2. The financial organization or IRS may require that each IRA owner execute a new plan agreement and return a signed copy to the financial organization.

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When amending IRA documents for federal law changes and IRS pronouncements, the financial organization generally does not need to obtain the IRA owner’s signature as consent. Depending on the type of amendment, plan document, and state law, amendments other than or in addition to law changes and IRS pronouncements may be done with negative consent. The IRA document may have a “deemed consent” provision in which the IRA owner is considered to have consented if the financial organization does not receive an objection within a certain number of days (e.g., within 30 days of receipt).

Alternatively, certain amendments may require affirmative consent (i.e., a signed amendment by all parties). For example, a change in the trustee or custodian often requires affirmative consent. If a financial organization is unsure if a signature is required for a proposed amendment, it should consult legal counsel.

Amending IR Annuity EndorsementsIR annuity endorsements generally require amending as indicated for IRA prototype plans. Rev. Proc. 2010-48 contains guidance on updating IRA prototype documents and IR annuity contracts with new LRM language. Rev. Proc. 2010-48 describes new procedures and user fees for IR annuity opinion letter applications.

Prototype sponsors of IR annuities that use one IRA endorsement with one or more annuity contracts may submit only the IRA endorsement for approval, beginning with opinion letter applications submitted after December 13, 2010. The IRA endorsement must include all IRA qualification rules and must provide that the terms of the IRA endorsement supersede any conflicting terms in the annuity contracts to which the IRA endorsement applies. Before 2011, financial organizations sponsoring prototype IR annuities were required do multiple submissions based on the number of different insurance contracts to be used with each IR endorsement. Thus, this new procedure reduces the number of opinion letters issued and the corresponding user fees.

Sponsors that use different IRA endorsements for each contract or that simply want an opinion letter for each contract may submit applications to the IRS, and include with the applications all the document(s) that constitute the IRA. This change is reflected in the revised Form 5306, Application for Approval of Prototype or Employer Sponsored Individual Retirement Arrangement (IRA).

Disclosure Statement Amendments Treas. Reg. 1.408-6(d)(4)(ii)(B) requires financial organizations to amend disclosure statements whenever an amendment to a plan agreement affects the information contain ed in the disclosure statement. In addition, sometimes financial organizations may need to amend disclosure statements even if a new plan agreement has not been released or is not yet required to be amended.

Treas. Reg. 1.408-6(d)(4)(viii) states that financial organizations may include material, other than what is required by regulation, in disclosure statements as long as it does not create a false or misleading disclosure statement. This, along with the fact that certain IRS auditors have previously required disclosure statement amendments when plan agreements have not changed, has led Ascensus (and many others in the industry) to interpret that disclosure statement amendments generally are required for major law changes and IRS pronouncements regardless of whether plan agreements are amended. This determination usually is made by the forms provider or drafter.

There is no regulatory deadline specified for such an amendment, but a standard industry practice is to provide the updated disclosure statement within 30 days following the effective date of the law change or IRS pronouncement.

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Recent Disclosure Statement AmendmentsTreas. Reg. 1.408-6(d)(4)(viii) states that disclosure statements cannot contain language that creates a false or misleading disclosure statement. When there are law changes or IRS pronouncements affecting the information in the disclosure statements that financial organizations use, disclosure statements should be updated. The penalties for not providing proper IRA documents can be costly—$50 per failure.

Forms providers, like Ascensus, will lead the amendment process for financial organizations using their documents. Following is a summary of some of the more recent significant recommended disclosure statement amendments. For a complete list of required and recommended disclosure statement amendments, see the tables under “Amendment Checklists” later in this chapter.

2018 Disclosure Statement Amendments – Ascensus recommended disclosure statement amendments in 2018. The Bipartisan Budget Act of 2018 allowed relief for victims of California wildfires and Hurricanes Harvey, Irma, and Maria. It also granted rollover relief for returns of improper IRS levies and extended the 60-day rollover period for plan loan offset amounts due to plan termination or severance from employment.

2017 Disclosure Statement Amendments – Ascensus recommended disclosure statement amendments in 2017. The Tax Cuts and Jobs Act of 2017 eliminated the ability to recharacerize a Roth IRA conversion or employer-sponsored plan-to-Roth IRA rollover, effective for 2018 and later tax years. It also reduced the adjusted gross income threshold from 10 percent to 7.5 percent for the qualified medical expenses early distribution penalty tax exception.

2016 Disclosure Statement Amendments – Ascensus recommended disclosure statement amendments in 2016. The Consolidated Appropriations Act of 2016 (CAA), enacted December 18, 2015, extended qualified charitable distributions to 2015 and made them permanent. It also allowed individuals to roll over non-Roth retirement plan and Traditional IRA assets to SIMPLE IRAs after meeting the SIMPLE IRA two-year waiting period. Rev. Proc. 2016-47 allowed self-certification of a missed 60-day rollover deadline if certain requirements are met.

2014 Disclosure Statement Amendments – Ascensus recommended disclosure statement amendments in 2014. Two of the amendments were for major pieces of IRS guidance that affected IRAs. This guidance is summarized below.

• Announcement 2014-15 (released in March 2014) limits allowable IRA-to-IRA rollovers to one per taxpayer per 12 months. Announcement 2014-15 applies to IRA distributions taken on or after January 1, 2015. (Before January 1, 2015, taxpayers were allowed to roll over one IRA distribution for each IRA that they owned.)

• The IRS released final qualifying longevity annuity contract regulations (TD 9673) in July 2014. These regulations allow a Traditional IRA owner to reduce the Traditional IRA’s prior year-end value by the values of any qualifying longevity annuity contracts held within the Traditional IRA investment, when calculating the required minimum distribution for the Traditional IRA.

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2012 Disclosure Statement Amendments – The FAA Modernization and Reform Act of 2012 was enacted in February 2012. This law allowed certain payments received by participants in certain bankrupt airlines’ defined benefit pension plans to be rolled over to Traditional IRAs. The Worker, Retiree and Employer Recovery Act of 2008 (WRERA) originally allowed such payments to be rolled over only to Roth IRAs. The FAA Act had a temporary provision that expired after August 13, 2012, which allowed individuals who previously rolled over such amounts to Roth IRAs to recharacterize those assets to Traditional IRAs and to recover the taxes that were paid for those rollover assets. Ascensus recommended disclosure statement amendments for this change.

Amendment ProcedureDisclosure statements and plan agreements generally are amended in the same way. Financial organizations can obtain an amendment from a forms provider or, in some cases, draft their own. When both the plan agreement and disclosure statement can be amended at the same time, many forms providers combine the plan agreement and disclosure statement amendment into one document. Once financial organizations obtain the amendments, they should follow these procedures.

1. Mail each IRA owner a copy at the last known address. If any amendments are undeliverable and are returned to the financial organization, keep the undelivered amendments in the IRA owner’s file. A cover letter should be enclosed explaining the amendment.

2. Document the amendment mailing by either placing a copy in each file or creating a master file. A master file should contain a copy of each amendment, a dated cover letter, and a list of mailing recipients. Financial organizations with many IRAs usually prefer documenting amendments with a master file.

Sample Cover LettersThe financial organization should enclose a cover letter with the amendment to explain the reason that the amendment is being made. A simple explanation of any changes in IRA regulations usually decreases the number of phone calls from confused IRA owners.

Following are two sample cover letters for amendments to plan agreements and disclosure statements. The first letter is a sample letter for tax law changes and IRS pronouncements and the second is a sample letter for any other amendment reason. The sample letters may be revised to suit particular needs. Your letter should be revised if you require the IRA owner’s signature.

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Sample Letter for Tax Law Changes and IRA Pronouncements

Date

Dear IRA Owner:

Recent changes in the IRA rules (and/or in the IRS Form 5305, 5305-A, 5305-R, 5305-RA, or 5305-RB, Traditional or Roth IRA plan agreement) made by _____________________ (insert name of the law or IRS pronouncement) affect your IRA. We are required by the tax laws and regulations to provide you an amendment to your IRA documents to conform them to these new rules.

Enclosed is an amendment to your ________________ (insert plan agreement or disclosure statement, or both, whichever applies). Keep this amendment with the materials we gave you when you opened your IRA.

You do not need to sign or return anything to us to have this amendment apply to you. You may wish to consult your tax advisor to see what effect these changes in the rules may have on your tax situation. The changes discussed in the enclosed amendment generally are effective _____________ (insert effective date of change).

We recommend that you review this information carefully, and if you have any questions, please feel free to contact _________________________ at _________________________.

Sincerely,

Sample Letter for Other Amendment Reasons

Date

Dear IRA Owner:

Your IRA is being amended to _______________________________________ (insert reason, such as change of forms provider, charge a new service fee, etc.). Enclosed is an amendment to your ____________________ (insert plan agreement or disclosure statement, or both, whichever applies). Keep this amendment with the materials we gave you when you opened your IRA.

You do not need to sign or return anything to us to have this amendment apply to you. If we do not hear from you within 30 days (insert other number of days, if applicable) from the date this letter is mailed, we will conclude that you have consented to the terms of the new amendment. You may wish to consult your tax advisor to see what effect these changes may have on your tax situation. The changes discussed in the enclosed amendment generally are effective ______________ (insert effective date of change).

We recommend that you review this information carefully, and if you have any questions, please feel free to contact _________________________ at _________________________.

Sincerely,

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Retaining Proof of AmendingAmending IRAs is a compliance concern. Remember, there is a fine of $50 per amendment per IRA for missing amendments. The financial organization must be able to confirm to the IRS that IRAs have been amended in a timely manner. The financial organization should retain proof that the IRA amendment has been provided to each IRA owner. The financial organization can provide this proof by either

• placing a copy of the amendment in each IRA owner’s file, or

• placing a single copy of the amendment in a master file with a complete listing of the names and addresses of the IRA owners who received a copy of the amendment, as well as a copy of the cover letter that accompanied the amendment.

Financial Disclosures Need Not Be AmendedThe Treasury regulations contain no requirements for amending financial disclosures. Therefore, once provided to IRA owners, financial disclosures need never be amended.

Universal or “Catch-all” AmendmentWhen IRA administrators review their files to determine if all the amendments have been made, they may find that some amendments have been missed. A financial organization cannot go back and “make up” for a required amendment that should have been done within a certain time period. For amendments that have been missed, a financial organization could use a universal or “catch-all” amendment to bring the IRAs into compliance.

A catch-all amendment is made by sending a complete and current plan agreement and disclosure statement to all existing IRA owners. By providing a full plan agreement and disclosure statement, a financial organization can avoid having to gather and send many separate amendments that it may have missed. The amendment will contain all relevant information about past rule changes for which amendments should have been made. Although there are no guarantees that the IRS will not assess penalties for past failures to amend in a timely manner, the IRS may view this amendment as a good-faith effort to bring the IRA into compliance.

Mergers and AcquisitionsWhen financial organizations merge, are acquired, or purchase other organizations, the change in ownership usually affects IRA documentation. When a change of ownership occurs, the financial organization must review all IRA-related procedures and documentation to ensure a smooth transition.

The newly created or purchasing organization generally assumes the responsibilities of the former organization. Although each purchase or merger must be dealt with on a case-by-case basis, some guidelines are listed below.

1. Notify all IRA owners of the change in IRA trustee, custodian, or issuer according to the terms of the former organization’s IRA plan agreement and applicable state laws.

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2. Review IRAs (with the assistance of legal counsel) to assess the need for the following.

• Amendments to update IRAs for recent law changes and IRS pronouncements

• Amendments required to name a new trustee, custodian, or issuer

• Amendments required to modify IRAs to conform to the IRA program offered by the successor organization

• Additional information, such as beneficiary designations, IRA owner birth dates, etc.

3. Review the proposed amendment procedure with legal counsel.

Most acquisitions and mergers require some form of amendment to the previous plan document. The procedures needed to change a trustee or custodian or to alter plan language are controlled by the plan language and by state law.

One of two amendment methods usually is appropriate.

1. Have all IRA owners sign new plan documents to amend and replace the old plans.

2. Amend old documents by negative consent.

The negative consent method is sometimes permitted in plan documents or under state law for certain types of amendments. Amendment by “negative consent” permits financial organizations to send notice to clients of proposed changes. If the client does not object within a specified time, the client is deemed to have consented to and accepted the amendments. The financial organization’s attorney should determine whether amendment by negative consent may be used.

Amendments Required Following Forms Provider ChangeFrom time to time, a financial organization may wish to change IRA forms providers. When a financial organization changes the forms it uses, amendments may be required. The financial organization should review both the forms it currently uses and the forms it wishes to begin using. In some cases, the financial organization may simply just start using the new forms. In other cases, the financial organization may need to notify IRA owners of specific changes in the IRA program resulting from new language in the IRA documents. A financial organization also may amend for a law change or IRS pronouncement at the same time it amends for new forms.

Amendment ChecklistsMaking sure that IRA plan agreements and disclosure statements are up-to-date with regard to any necessary amendments is important. See the amendment review (next) that will help financial organizations verify whether IRAs at their financial organizations have been amended when necessary.

Opening an IRA • 31

Traditional IRA Amendment List

YearTax Act or IRS

PronouncementAmend Examples of Changes

1974 Employee Retirement Income Security Act (ERISA)

Created IRAs, effective in 1975. IRAs were restricted to individuals not covered by their employer’s qualified plan.

1976 Tax Reform Act Plan agreement, disclosure statement

Created spousal contributions and set the spousal limit as the lesser of 15% of a working spouse’s compensation or $1,750.

1978 Revenue Act Plan agreement, disclosure statement

Created simplified employee pension (SEP) plans. The SEP contribution level was set at the lesser of 15% of compensation or $7,500.

1981 Economic Recovery Tax Act (ERTA)

Plan agreement, disclosure statement

Allowed IRA contributions for anyone under age 70½ who earned income from personal services rendered, effective in 1982.

Increased the Traditional IRA regular contribution level to the lesser of $2,000 or 100% of compensation.

Eliminated collectibles as investments.

1982 Tax Equity and Fiscal Responsibility Act (TEFRA)

Plan agreement, disclosure statement

Eliminated rollovers of inherited IRAs, except for surviving spouses.

Added requirement that IRA distributions be subject to federal income tax withholding.

Allowed IRA-to-IRA partial rollovers.

1984 Tax Reform Act (TRA-84)

Disclosure statement Eliminated prior-year contributions during a tax extension period, thereby providing a deadline of April 15 for most taxpayers.

Increased SEP deduction limit to the lesser of 15% of compensation or $30,000.

Required the IRS to write new IRA distribution rules.

1986 Tax Reform Act (TRA-86)

Disclosure statement Added new requirements regarding who can take an IRA deduction.

Changed the spousal IRA rules by providing that a spouse with a “small amount of income” can receive a spousal contribution.

Created nondeductible IRA contributions.

32 • Opening an IRA

Traditional IRA Amendment List

YearTax Act or IRS

PronouncementAmend Examples of Changes

1988 Announcement 88-27

Plan agreement Stated that IRAs must be amended by December 31, 1988, to include language resulting from proposed regulations on distributions released in July 1987.

Technical and Miscellaneous Revenue Act (TAMRA)

Disclosure statement Stated that any current-year contribution may be removed as an excess before the tax return due date.

Required that if one spouse was an active participant in an employer-sponsored retirement plan, the other spouse is considered an active participant even if the spouses filed separate tax returns.

Clarified the excess distribution penalty tax and the exceptions to the early distribution penalty tax.

1992 Revenue Procedure 92-38

Plan agreement Added reference to the minimum distribution incidental benefit (MDIB) rule and to the aggregation of required minimum distributions (RMDs).

Unemployment Compensation Amendments

Disclosure statement Relaxed the rollover rules to permit most qualified plan distributions of all or any portion of the balance to the credit of a participant to be rolled over to an IRA, except certain ineligible rollover amounts.

Allowed qualified plan distributions to be rolled over directly into IRAs.

1996 Small Business Job Protection Act of 1996, Health Insurance Portability and Accountability

Disclosure statement Increased spousal contribution limit per couple from $2,250 to $4,000.

Changed reporting requirements so only distributions of $10 or more are reported.

Conformed reporting penalties to the general, tiered information reporting structure.

Suspended the excess distribution penalty tax for tax years 1997, 1998, and 1999.

Added exceptions to the early distribution penalty tax for distributions used to pay certain medical expenses and health insurance premiums.

Opening an IRA • 33

Traditional IRA Amendment List

YearTax Act or IRS

PronouncementAmend Examples of Changes

1997 Taxpayer Relief Act of 1997

Disclosure statement

New model plan agreements

Increased the Traditional IRA deductibility thresholds for active participants in employer-sponsored retirement plans.

Eliminated the requirement that one spouse’s active participation status affects the others spouse’s active participant status for Traditional IRA deductibility purposes.

Created penalty-free early IRA distribution reasons to pay for certain higher educational expenses and first-time home buyer expenses.

Permanently repealed the 15% excess distribution penalty tax and the 15% excess accumulation penalty tax.

Allowed certain platinum coins and certain gold, silver, platinum, or palladium bullions as IRA investments as long as the bullion or coins are in the possession of the IRA trustee or custodian.

2001 REG 130477-00 and 130481-00

Plan agreement, disclosure statement

Introduced a uniform distribution period for calculating RMDs.

Altered beneficiary options.

Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

Plan agreement, disclosure statement

Increased contribution limits, created catch-up contributions, expanded portability of assets, provided for tax credits, and more.

2002 Revenue Procedure 2002-10

Plan agreement, disclosure statement

Provided requirements for amending IRA and IRA-based plan documents for changes because of EGTRRA and final distribution regulations.

Final required distribution regulations (TD 8987)

Plan agreement, disclosure statement

Finalized beneficiary distribution options and changed the rules for calculating RMDs.

Announcement 2002-49

Plan agreement, disclosure statement

Extended deadline to October 1, 2002, for using new documents to establish IRAs and IRA-based plans.

2004 Additional final RMD regulations (TD 9130)

Annuity endorsement and disclosure statement amending not immediately required, but anticipated upon future IRS guidance

Retained the basic rules of temporary regulations issued in TD 8987, clarified when annuity contracts may provide for increasing benefits, and added more freedom to change annuity payouts after they have begun.

Altered separate accounting rules related to beneficiary subaccounts.

34 • Opening an IRA

Traditional IRA Amendment List

YearTax Act or IRS

PronouncementAmend Examples of Changes

2006 Katrina Emergency Tax Relief Act of 2005, Gulf Opportunity Zone Act of 2005

Disclosure statement Allowed qualified victims of Hurricanes Rita, Katrina, or Wilma favorable tax treatment for certain distributions and rollovers. Provided exceptions to the early distribution penalty tax for qualified distributions.

Tax Increase Prevention and Reconciliation Act of 2005

Disclosure statement Eliminated the $100,000 income limitation and married single filer restriction from conversion eligibility requirements, beginning in 2010.

Pension Protection Act of 2006 (CPPA)

Disclosure statement Made EGTRRA changes permanent, allowed nonspouse beneficiary rollovers from qualified employer-sponsored plans to inherited Traditional IRAs, indexed the income limits for deductible Traditional IRA contributions, and allowed penalty-free distributions for certain military reservists, including recontributions within an extended period of time.

Tax Relief and Health Care Act of 2006

Disclosure statement Allowed taxpayers a one-time direct transfer of IRA assets to a health savings account.

2007 Announcement 2007-55

Prototype plan agreement, disclosure statement

A revised Traditional IRA prototype document listing of required modifications (LRMs) was released, which included PPA provisions. Ascensus recommended amending Traditional IRA prototypes.

2008 Heroes Earnings Assistance and Relief Tax Act of 2008

Disclosure statement Made permanent the PPA provision allowing qualifying reservists to take penalty-free IRA distributions and later recontribute these amounts.

Emergency Economic Stabilization Act of 2008

Disclosure statement Extended qualified charitable distributions through 2009, allowed rollovers of Exxon Valdez oil spill litigation payments, expanded tax relief under the Katrina Emergency Tax Relief Act of 2005 to victims of the Midwestern disaster area.

Worker, Retiree, and Employer Recovery Act of 2008

Disclosure statement Waived 2009 RMDs for IRA owners and beneficiaries.

Opening an IRA • 35

Traditional IRA Amendment List

YearTax Act or IRS

PronouncementAmend Examples of Changes

2010 Revenue Procedure 2010-48

Prototype plan agreement, disclosure statement

Provided information for amending Traditional IRA prototype documents for updated LRMs, reflecting various law changes since 2002.

Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

Disclosure statement Extended qualified charitable distributions through 2011.

2012 FAA Modernization and Reform Act of 2012

Disclosure statement Allowed certain airline employees to roll over or recharacterize qualified settlement payments to a Traditional IRA.

2013 American Taxpayer Relief Act of 2012

Disclosure statement Extended qualified charitable distributions through 2013.

2014 IRS Announcement 2014-15

Disclosure statement Limited the number of allowable IRA-to-IRA rollovers to one per taxpayer per 12 months, effective for any distributions taken on or after January 1, 2015.

Final qualifying longevity annuity contract regulations (TD 9673)

Disclosure statement For required minimum distribution calculations, required reducing the IRA’s prior year-end value by the value of any qualifying longevity annuity contracts held within the IRA.

FAA Modernization and Reform Act of 2012 amendment (P.L. 113-243)

Disclosure statement Extended the ability for certain airline employees to roll over certain qualified settlement payments to Traditional and Roth IRAs.

Tax Increase Prevention Act of 2014

No Ascensus document impact

Extended qualified charitable distributions through 2014.

2015 Consolidated Appropriations Act of 2016

Disclosure statement Allowed Traditional IRA assets to be rolled over to SIMPLE IRAs. Made qualified charitable distributions permanent.

36 • Opening an IRA

Traditional IRA Amendment List

YearTax Act or IRS

PronouncementAmend Examples of Changes

2016 Revenue Procedure 2016-47

Disclosure statement Allowed self-certification of missed 60-day rollover deadline if certain requirements are met.

2017 IRS model plan documents updated

Plan agreement IRS updated language to reflect more recent cost-of-living adjustments.

Tax Cuts and Jobs Act of 2017

Disclosure statement Eliminated the ability to recharacterize a Roth IRA conversion or employer-sponsored plan-to-Roth IRA rollover, effective for tax years beginning after December 31, 2017.

For 2017 and 2018, reduced AGI threshold from 10% to 7.5% for penalty exception for qualified medical expenses.

2018 Bipartisan Budget Act of 2018

Disclosure statement Allowed relief for victims of California wildfires, Hurricanes Harvey, Irma, and Maria.

Allowed for rollover relief for returns of improper IRS levies.

Extended the 60-day rollover period for plan loan offset amounts due to plan termination or severance from employment.

NOTE: Plan agreements must be amended when the IRS updates the model IRA documents and requires organizations to amend to the new version. Disclosure statements also must be updated at the same time. Disclosure statements must be up-to-date for current laws at the time the IRA is opened. When information in the disclosure statement, but not the plan agreement, is modified, it is highly recommended that all existing IRA disclosure statements be amended.

Opening an IRA • 37

Roth IRA Amendment List

YearTax Act or IRS

PronouncementAmend Examples of Changes

1997 Taxpayer Relief Act of 1997

Created Roth IRAs.

1998 Tax Technical Corrections Act of 1998

Disclosure statement Defined the five-year period (nonexclusion period) required for a qualified distribution.

Created the early distribution penalty tax rules applicable to distributions of converted assets within five years of the conversion.

Created distribution ordering rules.

Changed, effective January 1, 2005, the definition of modified adjusted gross income (MAGI) for purposes of the income limit ($100,000) for Traditional IRA-to-Roth IRA conversions.

Allowed taxpayers to apply four-year ratable taxation for 1998 conversions.

Allowed Roth IRA owners to recharacterize Roth IRA contributions as Traditional IRA contributions if done before the tax filing deadline plus extensions.

Clarified the $100,000 income limit for conversion eligibility as applying in the year of distribution.

Amended the definition of MAGI for Roth IRAs.

Clarified the MAGI phase-out range for Roth IRA regular contributions as $0 to $10,000 for married individuals filing a separate return.

Proposed Roth IRA Regulations (REG 115393-98) Effective 1/1/98

Disclosure statement Provided that for years beginning on or after January 1, 2005, the RMD from a Traditional IRA is not included when determining MAGI for purposes of Roth conversion eligibility.

Clarified rules regarding conversions.

Detailed procedures for recharacterizing contributions.

Clarified qualified distributions and the five-year period for surviving spouse beneficiaries.

Verified withholding rules apply to Roth IRA distributions.

Addressed the effect of multiple beneficiaries.

Clarified RMD issues for beneficiaries of Roth IRAs.

Affirmed employer-sponsored Roth IRAs.

Verified all conversions are reportable transactions.

Introduced redesignating as a means to convert or recharacterize contributions.

Provided that aggregate excess contributions not removed from the Roth IRA on or before the IRA owner’s tax return due date, plus extensions, becomes Roth IRA contributions for subsequent years.

38 • Opening an IRA

Roth IRA Amendment List

YearTax Act or IRS

PronouncementAmend Examples of Changes

2001 Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA)

Amendments anticipated following release of revised model IRS plan agreements

Increased contribution limits.

Created catch-up contributions.

Expanded portability of assets.

Provided for tax credits.

Created qualified Roth contribution programs.

2002 Revenue Procedure 2002-10

Plan agreement, disclosure statement

Provided requirements for amending Roth IRA plan documents for changes because of EGTRRA and final distribution regulations.

Final required minimum distribution regulations (TD 8987)

Plan agreement, disclosure statement

Finalized beneficiary distribution options.

Implemented a Uniform Lifetime Table, and updated other life expectancy tables.

Announcement 2002-49

Plan agreement, disclosure statement

Extended deadline to October 1, 2002, for using new documents to establish IRAs.

2004 Additional final RMD regulations (TD 9130)

Annuity endorsement and disclosure statement amending not immediately required, but anticipated upon future IRS guidance

Altered separate accounting rules related to beneficiary subaccounts.

2006 Proposed Treasury regulations REG-146459-05

Disclosure statement Allowed designated Roth contributions in 401(k) and 403(b) plans, effective January 1, 2006, to be rolled over to Roth IRAs.

Katrina Emergency Tax Relief Act of 2005, Gulf Opportunity Zone Act of 2005

Disclosure statement Allowed qualified victims of Hurricanes Rita, Katrina, or Wilma favorable tax treatment for certain distributions and rollovers. Provided exception to the early distribution penalty tax for qualified distributions.

Tax Increase Prevention and Reconciliation Act of 2005

Disclosure statement Eliminated the $100,000 income limitation and married single filer restriction from conversion eligibility requirements, beginning 2010.

Pension Protection Act of 2006 (PPA)

Disclosure statement Made EGTRRA changes permanent, allowed rollovers from qualified employer-sponsored plans to Roth IRAs by participants and beneficiaries, indexed the income limits for eligibility for Roth contributions, and allowed penalty-free distributions for certain military reservists and the opportunity for recontributions.

Tax Relief and Health Care Act of 2006

Disclosure statement Allowed taxpayers a one-time direct transfer of IRA assets to a health savings account.

Opening an IRA • 39

Roth IRA Amendment List

YearTax Act or IRS

PronouncementAmend Examples of Changes

2007 Announcement 2007-55

Prototype plan agreement, disclosure statement

Required amending prototype-only Roth IRA plan agreements to accept designated Roth account rollovers from 401(k) and 403(b) plans.

2008 Heroes Earnings Assistance and Relief Tax Act of 2008

Disclosure statement Made the PPA provision allowing qualified reservists to take the penalty-free IRA distribution and later recontribute these amounts permanent, and allowed certain military-related death payments to be rolled over tax-free to Roth IRAs.

Emergency Economic Stabilization Act of 2008

Disclosure statement Extended qualified charitable distributions through 2009, allowed rollovers of Exxon Valdez oil spill litigation payments, expanded tax relief under the Katrina Emergency Tax Relief Act of 2005 to victims of the Midwestern disaster area.

Worker, Retiree, and Employer Recovery Act of 2008

Disclosure statement Waived 2009 RMDs for Roth IRA beneficiaries, and allowed certain airline employees to roll over qualified settlement payments.

2010 Revenue Procedure 2010-48

Prototype plan agreement, disclosure statement

Provided information for amending Roth IRA prototype documents for updated LRMs, reflecting various law changes since 2002.

Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

Disclosure statement Extended qualified charitable distributions through 2011.

2012 FAA Modernization and Reform Act of 2012

Disclosure statement Allowed certain airline employees to recharacterize to a Traditional IRA certain qualified settlement payments that were rolled over to a Roth IRA.

2013 American Taxpayer Relief Act of 2012

Disclosure statement Extended qualified charitable distributions through 2013.

2014 IRS Announcement 2014-15

Disclosure statement Limited the number of allowable IRA-to-IRA rollovers to one per taxpayer per 12 months, effective for any distributions taken on or after January 1, 2015.

FAA Modernization and Reform Act of 2012 amendment (P.L. 113-243)

Disclosure statement Extended the ability for certain airline employees to roll over certain qualified settlement payments to Traditional and Roth IRAs.

Tax Increase Prevention Act of 2014

No Ascensus document impact

Extended qualified charitable distributions through 2014.

40 • Opening an IRA

Roth IRA Amendment List

YearTax Act or IRS

PronouncementAmend Examples of Changes

2015 Consolidated Appropriations Act of 2016

Disclosure statement Made qualified charitable distributions permanent.

2016 Revenue Procedure 2016-47

Disclosure statement Allowed self-certification of missed 60-day rollover deadline if certain requirements are met.

2017 IRS model plan documents updated

Plan agreement IRS updated language to reflect more recent cost-of-living adjustments.

Tax Cuts and Jobs Act of 2017

Disclosure statement Eliminated the ability to recharacterize a Roth IRA conversion or employer-sponsored plan-to-Roth IRA rollover, effective for tax years beginning after December 31, 2017.

For 2017 and 2018, reduced AGI threshold from 10% to 7.5% for penalty exception for qualified medical expenses.

2018 Bipartisan Budget Act of 2018

Disclosure statement Allowed relief for victims of California wildfires, Hurricanes Harvey, Irma, and Maria.

Allowed for rollover relief for returns of improper IRS levies.

Extended the 60-day rollover period for plan loan offset amounts due to plan termination or severance from employment.

NOTE: Plan agreements must be amended when the IRS updates the model IRA documents and requires organizations to amend to the new version. Disclosure statements also must be updated at the same time. Disclosure statements must be up-to-date for current laws at the time the IRA is opened. When information in the disclosure statement, but not the plan agreement, is modified, it is highly recommended that all existing IRA disclosure statements be amended.

Opening an IRA • 41

Beneficiary Designations

Although designating beneficiaries is not an IRS requirement, it is important for both financial organizations and IRA owners. An IRA owner may indicate the individuals or entities that will have rights to any assets remaining in the IRA when the IRA owner dies. If proper procedures are followed, financial organizations should have no difficulty in determining the proper recipient of the IRA assets. To assure the validity of the beneficiary designation, the IRA owner should sign and date the document used to name beneficiaries (e.g., the IRA application or IRA beneficiary designation form). Many financial organizations require a witness to verify the IRA owner’s signature.

Primary vs. Contingent BeneficiariesThe IRA owner may be allowed to name primary and contingent beneficiaries. A primary beneficiary is the individual or entity intended to receive the IRA assets upon the IRA owner’s death. A contingent beneficiary is an individual or entity intended to replace the primary beneficiary if the primary beneficiary dies before the IRA owner or disclaims her interest in the IRA.

Clearly Document Beneficiary DesignationsThe information on an IRA application or IRA beneficiary designation form should be clearly documented. The IRA owner should specify the name, address, birth date, and Social Security number of any beneficiary. The IRA owner may name an entity other than an individual as a beneficiary. For example, an individual may name a church, a school, a trust, a corporation, an estate, etc., to inherit the IRA assets. The beneficiary designation should have as much information as is available on these entities: name, address, federal tax identification number, etc.

If the IRA owner does not have the beneficiary’s birth date or Social Security number (or federal tax identification number), the designation is still valid. But, if possible, the IRA administrator should follow up on obtaining this information. A Social Security or tax identification number will be needed to report a distribution.

There are two specific occasions when the Traditional IRA administrator will reference the information on the beneficiary designation. This information may be needed when the IRA owner reaches age 70½ and begins RMDs and when the IRA owner dies. There is no RMD requirement for Roth IRAs, but beneficiary data still is essential to properly process Roth IRA death distributions.

The IRA owner should clearly indicate the percentage of the IRA assets to go to each beneficiary. Caution the IRA owner to avoid such phrases as “to all my children to be divided equally,” which may lead to confusion and, possibly, to a court determination of how the assets are to be paid out.

Per Capita vs. Per Stirpes Beneficiary DesignationsTaxpayers are increasingly adopting more sophisticated estate planning goals. Financial organizations are sometimes asked if they will accept a different, often more complicated, type of beneficiary designation, usually drafted by an estate planner or attorney. One such form of designation is a “per stirpes” beneficiary designation. Thus, the distinction between a “per capita” and “per stirpes” succession of assets becomes relevant. Simply stated, a per stirpes designation allows assets to flow through a deceased beneficiary to that beneficiary’s descendants (through the beneficiary’s “roots”). A per capita designation, which is commonly used by financial organizations, generally passes assets in equal shares to members of the same “class” of living beneficiaries.

42 • Opening an IRA

Per Capita ExampleMaria names her two kids, Tom and Susan, as equal primary beneficiaries on her IRA. Maria’s IRA document has a presumption of a per capita designation. If Tom predeceases Maria, his share (50 percent) of the IRA assets will pass to Susan upon Maria’s death. Susan will receive 100 percent of the IRA assets, leaving Tom’s family with no share of the IRA.

Per Stirpes ExampleMaria’s attorney drafts a typical per stirpes beneficiary designation that names her two kids, Tom and Susan, as equal primary beneficiaries of her IRA. If Tom predeceases Maria, his share (50 percent) of the IRA assets will pass to his children upon Maria’s death rather than 100 percent passing to Susan. Thus, Maria ensures that each child’s family will benefit equally.

Document IssuesFinancial organizations are not required to accept any specific beneficiary designation presented by an IRA owner, including the per stirpes beneficiary designations. Financial organizations should consult with their forms provider or legal counsel to determine the presumption under the existing document and whether alternative designations can be accommodated under the existing document. If willing to accept beneficiary designations typically not used by the financial organization, procedures should be established to ensure that the designations received contain proper information so that the financial organization will understand who the beneficiaries are and how to pay out assets after death.

Spousal WaiverSome beneficiary designations contain a spousal consent and waiver. The spousal consent is essential in many community property and marital property states when an IRA owner wishes to name a beneficiary other than (or in addition to) the spouse. Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington. Alaska also has adopted community property laws, but the married couple must make a specific election to have these laws apply. Wisconsin’s Marital Property Act also is based upon key community property principles.

In community property states, if the spouse has not consented to the naming of an additional or another beneficiary, the spouse generally is entitled to a portion of the IRA assets when the IRA owner dies, even if someone else is designated as beneficiary. Spousal consent generally is not necessary in noncommunity and nonmarital property states. But even for these states, financial organizations may wish to set their own policies as to whether spousal consent is recommended.

Revoking Prior Beneficiary DesignationsAn IRA owner occasionally may wish to revoke or modify a previous beneficiary designation. The new designation should be made on either a new beneficiary form or a form designed to supplement an existing beneficiary designation. The IRA owner should sign and date the new or supplemental beneficiary form. The IRA owner date is important because it demonstrates that this beneficiary designation was made later in time than the previous designation. Again, the financial organization may wish to have the designation witnessed to authenticate the IRA owner’s wishes.

Opening an IRA • 43

IRA Contribution Information

Many financial organizations document Traditional and Roth IRA contributions for purposes of government reporting. Many financial organizations choose to use a contribution form to validate IRA contributions and to send to their data processors to ensure that accurate reports are generated.

An IRA contribution form requires two essential pieces of information that most non-IRA contribution forms will not address. The IRA contribution form requests the type of contribution being made (e.g., regular, rollover, transfer, spousal, and the type of IRA receiving the contribution) and the tax year for which the contribution is being made. Both pieces of information are mandatory for correct contribution reporting on IRS Form 5498, IRA Contribution Information.

An IRA contribution form should require the IRA owner’s signature. To make prior-year contributions, Treasury regulations require IRA owners to make a written election (signature) to treat contributions as made for the prior year. The financial organization typically attempts to have each IRA owner sign the contribution form acknowledging that the IRA transaction took place as designated on the form. By doing so, if any discrepancies arise regarding how the financial organization reported the IRA contribution as compared to how the IRA owner treated the IRA contribution on his or her tax return, the financial organization will have written verification of what actually transpired.

IRA Opening Documents Log Sheet

Financial organizations may use (and revise as necessary) the IRA Opening Documents Log Sheet to help ensure that the compliance requirements for Traditional and Roth IRA plan agreements and disclosure statements have been met. The log sheet tracks that an IRA owner has received the required documents, that the financial organization has the required signatures, and if applicable, that the IRA has been timely revoked. It also may be used to record when an IRA owner’s plan agreement and disclosure statement are amended. The log sheet should be retained in the IRA owner’s file.

©2018 Ascensus, LLC

IRA Opening Documents Log Sheet

Financial organization name ________________________________________________________________________

Client name _____________________________________________________________________________________

Address _________________________________________________________________________________________

_________________________________________________________________________________________

Telephone _______________________________________________________________________________________

IRA Type

Traditional

Roth

IRA Application

Date received _______________________________________

Date signed ________________________________________

Plan Agreement

Form used ________________________________________________ Revision date ___________________

Copy to IRA owner: Date _____________________________

Copy retained: Signed plan agreement

Signed acknowledgment that IRA owner received plan agreement

Disclosure Statement

Form used ________________________________________________ Revision date ___________________

Copy to IRA owner: Date _____________________________

Copy retained: Signed disclosure statement

Signed acknowledgment that IRA owner received disclosure statement (including financial disclosure)

©2018 Ascensus, LLC

Financial Disclosure

Form used _________________________________________

Copy to IRA owner: Date _____________________________

IRA Revocation

IRA revoked within 7 days: Date revoked ________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

IRA Documents Amended

Plan agreement Revision date ________________ Date delivered ___________________

Disclosure statement Revision date ________________ Date delivered ___________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Plan agreement Revision date ________________ Date delivered ___________________

Disclosure statement Revision date ________________ Date delivered ___________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Plan agreement Revision date ________________ Date delivered ___________________

Disclosure statement Revision date ________________ Date delivered ___________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Plan agreement Revision date ________________ Date delivered ___________________

Disclosure statement Revision date ________________ Date delivered ___________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

46 • Opening an IRA

IRA Withholding • 47

Chapter 3

IRA WithholdingTraditional and Roth IRA Withholding

Liability for Withholding

Withholding for U.S. Citizens and Resident Aliens

Withholding for Nonresident Aliens

Withholding for Expatriates

Depositing and Reporting Withholding

State Withholding

Withholding Election Log Sheet

Traditional and Roth IRA Withholding

Withholding from an IRA distribution is the prepayment of income taxes at the time of distribution. The amount that is withheld is credited against the individual’s total tax liability for the year. If the individual has had more income tax withheld (from all sources) than his tax liability, he will receive a tax refund after he files his income tax return. If the individual’s tax liability exceeds the amount she has had withheld, she will have to pay an additional amount of tax. Since January 1, 1983, federal income tax withholding requirements have applied to IRA distributions. In addition, some states may require withholding for state income taxes. A financial organization should check with its state department of revenue for information on state withholding.

IRC Sec. 3405 addresses federal income tax withholding on distributions from certain tax-favored arrangements, such as IRAs. Such distributions generally are subject to withholding unless it is reasonable to believe the distribution is not includible in the taxpayer’s gross income. Traditional IRA distributions are always treated as includible in gross income for withholding purposes (Treas. Reg. 1.408A-6, Q&A 13 and IRC Sec. 3405(e)(1)(B)). Some exceptions apply, such as a return of nondeductible contributions or amounts properly rolled over. Federal withholding is not required for any IRA distribution where it is reasonable to believe that the entire distribution amount is not includible in the IRA owner’s gross income (IRC Sec. 3405(e)(1)(B)(ii) and Temporary Treasury Regulation (Temp. Treas. Reg.) 35.3405-1T, D-16).

The Consolidated Appropriations Act of 2001 provides for a limited exception from withholding on Roth IRA distributions because of the tax-free nature of certain Roth IRA distributions (IRC Sec. 3405(e)(1)(B)). No withholding or waiver of withholding applies to a Roth IRA distribution unless there is reason to believe a distribution is taxable.

48 • IRA Withholding

The Instructions for Forms 1099-R and 5498 state that Roth IRA distributions generally are not subject to withholding except on the earnings portion of excess contributions. In addition, the instructions to Form W-4P, Withholding Certificate for Pension or Annuity Payments, state that qualified Roth IRA distributions are not taxable and, therefore, are not subject to withholding.

Ascensus recommends that if it is reasonable to believe that a Roth IRA distribution is, or could be, subject to taxation, payers should apply withholding rules. If a financial organization has all the information needed to be sure that a distribution is a qualified distribution, it would be reasonable for the payer to conclude that no withholding applies. If there is uncertainty about the taxability of the Roth IRA distribution, the safest course of action for the financial organization would be to assume that withholding applies and offer the Roth IRA owner the opportunity to waive withholding on Form W-4P or a suitable substitute form.

Liability for Withholding

Payers (financial organizations making IRA distributions) are responsible for applying the IRA withholding requirements for distributions that, in aggregate, exceed $200 per year. The applicable withholding rate generally depends on whether the distribution is from an individual retirement (IR) account under IRC Sec. 408(a) or an annuitized individual retirement (IR) annuity under IRC Sec. 408(b). Should a financial organization fail to withhold as directed in the signed election of the recipient (i.e., the IRA owner or a beneficiary) or fail to withhold 10 percent if the recipient does not make an election, the financial organization will be responsible for the amount of the withholding that should have been retained but was not (IRC Sec. 3405(d)(1)).

Withholding is not required for any portion of an IRA distribution for which it is reasonable to believe is not includible in the IRA owner’s gross income (IRC Sec. 3405(e)(1)(B)(ii) and temporary Treasury regulation 35.3405-1T, D-16)). Financial organizations may apply withholding only to the taxable portion of the distribution if they know the nontaxable portion of the distribution. So unless financial organizations reasonably believe that they know the nontaxable portion of the distribution, they must treat the entire distribution as taxable and withhold on the gross distribution amount (unless the IRA owner elects to waive withholding).

Withholding for U.S. Citizens and Resident Aliens

The first step in determining the withholding requirements that financial organizations must follow with regard to IRA distributions is to determine the citizenship status of the individual who will receive the distribution. The recipient (the IRA owner or the IRA owner’s beneficiary, if applicable) will either be a U.S. citizen, an alien considered a U.S. resident, or a nonresident alien. The citizenship status will dictate how much income tax, if any, the financial organization must withhold on the IRA distribution and whether the recipient may waive applicable withholding requirements. U.S. citizens and resident aliens are subject to withholding under IRC Sec. 3405, while nonresident aliens (defined later in this chapter) are subject to the withholding rules under IRC. Sec. 1441.

IRA Withholding • 49

U.S. Citizens and Resident AliensIRS Publication 505, Tax Withholding and Estimated Tax, states that U.S. citizens and resident aliens of the U.S. who provide a home address outside of the U.S. are subject to the withholding rules for periodic or nonperiodic payments (10 percent or the withholding rate applicable for a married taxpayer with three exemptions, as appropriate) and generally may not waive the withholding requirement (IRC Sec. 3405(e)(13)). The only way a U.S. citizen or resident alien can avoid income tax withholding on IRA distributions is by providing the payer of the IRA distribution with his home address in the U.S. or in a U.S. possession (e.g., Guam, American Samoa, U.S. Virgin Islands) to which the IRA distribution may be sent and by taking delivery of the assets within the U.S. The address must be a home address (physical street address); providing a U.S. address that is not a home address to which the distribution may be sent or providing a post office box address does not suffice.

A resident alien of the U.S. is defined as a citizen of another country who meets either the green card test or the substantial presence test as defined below.

• The green card test is met if the alien was a lawful, permanent resident of the U.S. at any time during the calendar year. This is commonly known as the “green card test” because these aliens hold immigrant visas (which used to be green cards).

• The substantial presence test is more complex. The test is met if the alien is physically present in the U.S. on at least 31 days during the current calendar year, and 183 days during the current year and the two preceding years combined, counting all the days of physical presence in the current year, but only one-third of the number of days of presence in the first preceding year, and only one-sixth the number of days in the second preceding year. For purposes of the substantial presence test, the days the alien is in the U.S. as a teacher, student, or trainee on an “F,” “J,” “M,” or “Q” visa generally are not counted. (See IRS Publication 519, U.S. Tax Guide for Aliens, for certain exceptions for consideration of days present in the U.S.)

Presumably, the recipient will be able to disclose to the IRA administrator whether she is considered a resident alien.

The following example shows how the IRA withholding rules affect U.S. citizens and resident aliens who have IRA assets delivered to an address outside of the U.S.

EXAMPLE: Tony, a U.S. citizen living in Italy, requests a $10,000 distribution from his IRA. Tony wishes to waive the 10% withholding that applies to his IRA distributions. The financial organization requests that Tony provide his U.S. home address to which the distribution may be delivered. Because Tony’s only home address is in Italy, he cannot provide the financial organization with a U.S. home address. As a result, Tony may not waive withholding. The financial organization must withhold 10% of $10,000 ($1,000). Tony may elect to have more than 10% withheld.

Periodic and Nonperiodic DistributionsThe withholding requirements that apply to IRA distributions delivered to U.S. citizens and resident aliens differ depending upon whether the distributions are deemed to be periodic or nonperiodic.

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Under Temp. Treas. Reg. 35.3405-1T, F-15, all IRA distributions that are “payable on demand” are deemed nonperiodic distributions. Nonperiodic distributions are subject to 10 percent withholding. The nature of payable upon demand requires that the IRA owner have the ability to request a partial or total distribution from the IRA at any point in time. Because IRA owners and beneficiaries can request distributions whenever they wish, IRA distributions are considered payable on demand and are deemed nonperiodic distributions.

For example, Bev (age 63), an IRA owner, could choose to receive a distribution of $100 in March and then a distribution of $500 in December of the same year. Bev can request distributions of any amount and at any frequency. As such, the distributions are payable on demand and are deemed nonperiodic. The distributions are subject to a flat withholding rate of 10 percent (although the recipient may request a different amount, as discussed later).

Annuitized distributions under IR annuities are not considered payable on demand and are considered periodic payments and are subject to different withholding requirements than nonperiodic payments. According to IRC Sec. 3405, these periodic payments are treated as wages, and withholding is determined by using the income tax withholding tables with the assumption that the recipient is married and has three exemptions (unless the distribution recipient chooses a different withholding rate). The flat rate of 10 percent would not apply. For example, if Calvin (age 60), an IR annuity owner, chooses to annuitize his contract so that he receives a steady stream of $100 monthly payouts, the IR annuity payments are not payable on demand. The payments from the annuitized contract are treated as periodic rather than nonperiodic.

Additional WithholdingIn an IRS information letter (INFO 2001-0227), the IRS indicated that a base amount of withholding must be determined using withholding allowances, based on certain withholding formulas (e.g., based on the wage tables for periodic distributions or using the 10 percent withholding level for nonperiodic distributions). The current Form W-4P indicates that an IRA owner may request additional withholding in a specific dollar amount for withholding above the base amount.

Withholding Notice and Election RequirementsBecause an IRA owner who is a U.S. citizen or resident alien may waive withholding or may elect to have more than the minimum amount withheld, financial organizations must provide IRA owners with Form W-4P or a substitute Form W-4P. Form W-4P serves as the notice to individuals that they may choose not to have withholding apply and the means by which they may elect withholding. If the financial organization offers a substitute form, the form must follow certain required guidelines or be submitted to the IRS for approval (News Release IR-83-3). Substitute Forms W-4P must include the following information.

• The form number (Form W-4P)

• The number and expiration date assigned by the Office of Management and Budget (OMB) to the Form W-4P (OMB 1545-0074)

• Space for the recipient’s name and address

• Space for the recipient’s Social Security number

• An entry that the recipient can mark to claim an exemption from withholding

• The substance of the official Form W-4P instructions, including the caution on penalties for not paying enough withholding or estimated tax during the year

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For periodic payments of pensions and annuities, the IRS also requires the following.

• A line where the recipient can show the number of allowances on which withholding is computed

• A line for marital status (single, married, or married but withhold at a higher single rate)

• A line to ask for an additional amount to be withheld from each payment

• Space for the recipient’s signature

Withholding Notice and Election TimingAn IRA owner generally may waive withholding or may elect to have more than the minimum amount withheld. Accordingly, the IRA owner must be given a notice of the right to waive withholding on IRA distributions or to have more than the minimum amount withheld. If the financial organization fails to give notice to the recipients of the right to waive federal withholding on IRA distributions, a $10 penalty could result for each failure (IRC Sec. 6652(h)). To provide proof of satisfying withholding reminder notice and election requirements, financial organizations should retain copies of the notice and election in the IRA owner’s file.

The notice requirement is satisfied by providing the IRA owner with a Form W-4P or a substitute Form W-4P (as defined previously). How often the financial organization must provide this notice depends on how frequently the IRA owner takes distributions.

• If an IRA owner is taking distributions quarterly or more frequently (e.g., the IRA owner has set up quarterly or monthly distributions), financial organizations need to provide a withholding notice only once per year at a reasonable time before the first payment each year.

• If an IRA owner is taking distributions less frequently than quarterly (e.g., the IRA owner has set up semi-annual distributions or has not preset any scheduled distributions), financial organizations must provide a withholding notice to the IRA owner no more than six months preceding each distribution.

After receiving the withholding notice, the distribution recipient may elect to waive withholding or to have more than the minimum amount (10 percent for IR accounts) withheld. The election is made on the withholding notice (Form W-4P or a substitute form).

Once an IRA owner makes a withholding election, it is valid until revoked. Financial organizations should retain copies of the elections in the IRA owners’ files. Although the financial organization must continue to provide withholding notices to the IRA owner, the first withholding election may be relied on until the IRA owner changes the election by signing another Form W-4P (or substitute form) (Temp. Treas. Reg. 35.3405-1T, D-32).

Following is the IRS Form W-4P. The complete form with instructions may also be found at the IRS website.

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Electronic Withholding ElectionsFinancial organizations may deliver applicable notices electronically or in paper form. Congress, the IRS, and other governmental authorities periodically issue guidance on the use of electronic media (e.g., email, Internet) with respect to retirement plan and IRA notices and elections. Although the use of electronic media is optional, as financial organizations become more sophisticated in their use of computer systems, they have more interest in electronic delivery.

The IRS issued proposed Treasury regulations (REG. 138362-04) in 2005, which served to reconcile existing provisions of the Internal Revenue Code, Treasury regulations, and the Electronic Signatures in Global and National Commerce Act (E-SIGN) (discussed later). These regulations (Treas. Reg. 1.401(a)-21) were finalized in Treasury Decision 9294 in October 2006, and contained requirements for the use of electronic media for certain retirement plan-related notices and elections. As noted in the final regulations, these requirements apply to IRAs as well as to simplified employee pension (SEP) plans, savings incentive match plan for employees of small employers (SIMPLE) IRA plans, and other retirement plans.

The regulations do not specifically list which IRA-related notices or communications apply under this guidance. The IRS clarifies, however, that the standards established in these regulations are the exclusive rules for using electronic media to deliver any retirement plan or IRA notice, election, or other communication required to be provided in written form. This may include, for example, the required minimum distribution statement, account statement, fair market value statement, and withholding reminder notice. In addition, the standards act as a “safe harbor” for any communications not required in written form, such as accepting beneficiary designations.

Electronic System Requirements The final regulations reiterate that any notice or election provided electronically must satisfy all the otherwise applicable requirements relating to that communication. These requirements include the timing, content, and delivery specifications particular to that notice or election.

NOTE: The Treasury regulations for electronic notices apply to employer-sponsored retirement plans and IRAs. For purposes of explaining the regulations in this section, any references to “participants” is assumed to also include IRA owners and beneficiaries (if applicable).

The electronic system used to produce participant notices and elections generally should meet the following requirements (Treas. Reg. 1.401(a)-21(a)(5)).

• The content of the notice and the medium through which it is delivered must be reasonably designed to provide the information in a manner no less understandable than if it was provided in a written paper document.

• At the time the applicable notice is provided, the electronic transmission must alert the recipient to the significance of the transmittal and provide any instructions needed to access the notice.

• The system must be able to retain an electronic record of the election or notice in a form that can be reproduced later, or the “legal effect, validity, or enforceability of such electronic record may be denied.”

Two Methods for Providing NoticesThe final regulations provide two methods for delivering notices electronically: the consumer consent method and the alternative method.

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Consumer Consent MethodThe consumer consent method retains all of the provisions of the proposed regulations and reflects the consumer consent requirements of E-SIGN Sec. 101(c) (Treas. Reg. 1.401(a)-21(b)).

• Before the plan may provide an applicable notice using an electronic medium, the participant must consent to receive the communication electronically.

• The consent generally must be made in a manner that reasonably demonstrates that the participant can access the notice in the electronic form that will be used to provide the notice.

• The consent may be made using a written paper document if the participant can still adequately demonstrate that he can access the notice in the electronic form that will be used to provide the notice.

• Before consenting, the participant must receive a disclosure statement that outlines the scope of the consent, the right to withdraw consent to receive the communication electronically, and the right to receive the communication on paper. The disclosure statement also must include any conditions, consequences, or fees associated with a withdrawal of consent. The disclosure must specify the hardware and software requirements for accessing the electronic media and the procedures for updating information to contact the participant electronically.

• In the event the hardware or software requirements change, new consent must be obtained from the participant.

Alternative MethodUnder the alternative method, an exemption from the consumer consent requirements is available if

• the applicable notice is available in an electronic medium that the participant is effectively able to access, and

• the participant is advised at the time the notice is provided that she can request and receive the notice in paper form at no charge.

Participant Consents and ElectionA participant may deliver a consent, election, request, agreement, or similar communication electronically if the following requirements are met (Treas. Reg. 1.401(a)-21(d)).

• The participant must be able to effectively access the system to transmit the election.

• The system must be designed to preclude someone else from making the participant’s election (e.g., assigning a personal identification number).

• The system must allow the participant to review, confirm, modify, or rescind the terms of the election before it becomes effective.

• The participant, within a reasonable time, must receive confirmation of the election through either a written paper document or an electronic medium under a system that satisfies the applicable notice requirements of the consumer consent delivery method or the alternative delivery method, discussed previously. (E-SIGN Sec. 101(c) does not apply to participant elections.)

• If the plan uses electronic media to issue an election that must be witnessed, the spouse’s signature must be witnessed in the physical presence of a plan representative or notary public, but the acknowledgment or notarization of the signature may be done electronically.

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In the preamble to the final regulations, the IRS notes that future technology could eventually provide the same safeguards as signing in the presence of a plan representative or notary public. Therefore, the regulations state that the Commissioner may provide, in the Internal Revenue Bulletin, that the use of certain electronic procedures are deemed to satisfy the physical presence requirement if they provide the same safeguards as the presence of the plan representative or notary public would provide.

Electronic SignatureThe electronic signature is a key element of the electronic withholding election process. According to Announcement 99-6, the electronic signature must

• identify the distributee submitting the electronic election, and

• authenticate the submission.

E-SIGN clears the way for many financial and business transactions to be completed with electronic signatures in lieu of handwritten, original signatures, and helps businesses and individuals take greater advantage of the efficiencies offered by the Internet. E-SIGN preempts most state statutes dealing with authentication of signatures and storage of records, thus providing a federal standard for many transactions conducted between parties linked electronically.

Also under E-SIGN, the electronic retention of records is permissible so long as the records accurately reflect the information necessary and are accessible to all persons entitled to access.

Specific ProvisionsParties involved must comply in the following areas.

• Both parties to the transaction must affirmatively consent to the use of electronic signatures and records.

• The legislation specifies that it will be up to the parties involved with the transaction to agree on the hardware and software necessary to implement electronic signatures and records.

• If a statute requires notarization, the notary information can be accomplished electronically.

The effective date for the electronic signatures portion of E-SIGN was October 1, 2000. The effective date for the document retention portion was March 1, 2001.

Retention of Notice and ElectionFinancial organizations should retain withholding notice and election data in each IRA owner’s file. Copies of withholding notices and elections that are made after the original election also should be retained to prove compliance with the applicable notice and election requirements. When a withholding notice and election is sent to an individual, he does not have to return the election form unless he wishes to change the election. Therefore, the dated copy of the notice and election proving that it was sent is sufficient to document that the notice requirement was satisfied.

Financial organizations with many IRA owners taking similar regular payouts (e.g., monthly) sometimes use a master file to document compliance with the withholding requirements. Typically, the master file contains a list of the IRA owners, a copy of the withholding reminder notice, a dated copy of a cover letter documenting when the notice was sent, and copies of any election changes.

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Many forms providers include the withholding notice and election as part of the distribution form. When the individual signs the distribution form, she is acknowledging receipt of the withholding notice as well. Usually, the financial organization only sends a withholding notice and election to the individual if she is not coming to the financial organization to take the distribution because she is having the distribution sent to her.

U.S. Citizen and Resident Alien ReportingThe financial organization will report an IRA distribution to the IRS and to the distribution recipient on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit- Sharing Plans, IRAs, Insurance Contracts, etc., if the IRA distribution is delivered to a U.S. citizen or resident alien. The financial organization reports the distribution in the recipient’s name and tax identification number (usually the Social Security number). If the recipient does not have a Social Security number, he should apply for one by filing Form SS-5, Application for a Social Security Card. Recipients who do not qualify for a Social Security number should apply for an individual tax identification number (ITIN) by filing Form W-7, Application for IRS Individual Taxpayer Identification Number. Financial organizations should make every effort to obtain a tax identification number from the recipient.

Amounts withheld from distributions reported on Form 1099-R must also be reported to the IRS on Form 945, Annual Return of Withheld Federal Income Tax. Form 945 filing requirements are discussed later in this chapter.

Withholding for Nonresident Aliens

Unlike U.S. citizens or resident aliens, nonresident aliens (persons who are not U.S. citizens or resident aliens, as defined earlier) who take IRA distributions are subject to a 30 percent withholding requirement under IRC Sec. 1441, or an applicable rate as specified under a tax treaty.

The rules under IRC Sec. 1441 require 30 percent withholding for nonresident aliens, but allow nonresident aliens to apply a reduced rate of withholding under a U.S. tax treaty for their resident country by completing Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals). If the recipient is an entity (e.g., a charity as a beneficiary located in Canada) rather than an individual, it would file Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities). To apply the applicable treaty rate, the IRA owner must provide the financial organization with a copy of Form W-8BEN. If a nonresident alien does not provide a Form W-8BEN, financial organizations must apply the mandatory 30 percent withholding.

NOTE: In the case of a nonresident alien individual working through a qualified intermediary, Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting, applies. (See “Nonresident Aliens Working Through Foreign Intermediaries” later in this chapter.) Specific instructions for the Forms W-8 series can be found in the Instructions for the Requester of Forms, W-8BEN, W-8BEN-E, W-8ECI, W-8EXP and W-8IMY.

The treaty rate comes into play when residents of certain foreign countries are entitled to reduced rates of, or exemption from, income tax pursuant to treaties that have been signed between their resident countries and the U.S. The exemptions or reduced rates differ among countries. The countries with which the U.S. has income tax treaties and the specific rates of withholding that apply to payments made to nonresident aliens of those countries may be found at the IRS website by searching “Tax Treaty Tables.”

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In January 2017, the IRS released the following proposed regulations and final regulations under Treasury Regulation 1.1441 pertaining to federal withholding on payments to nonresident aliens and foreign entities, including payments by financial organizations that report under the Foreign Accounts Tax Compliance Act (FATCA).

• Chapter 4 Regulations Relating to Verification and Certification Requirements for Certain Entities and Reporting by Foreign Financial Institutions

• Revision of Regulations Under Chapter 3 Regarding Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons.

• Regulations Regarding Withholding of Tax on Payments to Foreign Persons, Information Reporting and Backup Withholding on Payments Made to Certain U.S. Persons, and Portfolio Interest Treatment

• Regulations Relating to Information Reporting by Foreign Financial Institutions and Withholding on Certain Payments to Foreign Financial Institutions and Other Entities

The following example shows how the IRA withholding rules are affected when distributions are delivered to a nonresident alien.

EXAMPLE: Pierre, a nonresident alien who is a citizen of Canada, requests a distribution from his IRA that he established while he was working in the U.S. Pierre wishes to waive the 30% withholding that applies to nonresident aliens. Pierre submits Form W-8BEN to Anne at All American Bank, indicating that he is a nonresident alien and indicating that he is a resident of Canada. Anne refers to the correct tax treaty table at the IRS website to verify the applicable treaty rate for a pension or annuity distribution (which also applies to IRA distributions) of a citizen of Canada. Anne finds that the rate is 15% for a pension or annuity distribution. All American Bank withholds 15% on the IRA distribution.

Following is the IRS Form W-8BEN. The complete form with instructions also may be found at the IRS website.

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Nonresident Aliens Working Through Foreign IntermediariesSome payments of income to foreign persons, including IRA distributions, may be handled by foreign intermediaries. Foreign intermediaries include foreign custodians, brokers, nominees, or other persons that act as agents for another foreign person. For example, a foreign bank acts as a foreign intermediary if it controls, receives, holds, disposes of, or pays any item of income on behalf of a foreign person, including IRA distributions. Often, foreign intermediaries have no primary withholding or reporting responsibilities with respect to IRA distributions.

But some foreign intermediaries enter into agreements with the IRS to act as a qualified intermediary (QI). One benefit QIs have is that they may use certain simplified withholding and reporting methods. But QIs need not take on all primary withholding and reporting responsibilities. Form W-8IMY provided to the U.S. financial organization by the QI should identify the primary withholding and reporting responsibilities that the QI is handling and, by inference, those that remain the responsibility of the U.S. financial organization. The rules for determining withholding responsibilities when working with foreign intermediaries can be complex and can be a possible source of compliance failures. Financial organizations involved in such transactions should carefully study the applicable laws and guidance, and review any operational procedures associated with these transactions. (See IRS Publication 515 for more on foreign intermediaries.)

NOTE: When a foreign beneficial owner of an IRA requests an IRA distribution from a U.S. financial institution through a foreign intermediary, the intermediary provides the institution with a Form W-8IMY. Based on the withholding and reporting responsibilities assumed by the intermediary, additional information may or may not be required.

Determining CitizenshipIRS Publication 519, U.S. Tax Guide for Aliens, provides assistance in determining citizenship. According to Publication 519, distribution recipients must provide the payer with Form W-8BEN to claim a reduced rate of withholding under a tax treaty.

Nonresident Alien ReportingForm 1099-R is not filed in cases where the withholding provisions of IRC Sec. 1441 rather than IRC Sec. 3405 apply. If the recipient of the IRA distribution is a nonresident alien who is subject to withholding at 30 percent or the applicable treaty rate, the financial organization must send Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, to both the IRS and the recipient. The financial organization must file Form 1042-S even if as a result of the treaty rate nothing is withheld. The financial organization does not file Form 1099-R to report these distributions. Beginning with the 2017 Form 1042-S, a unique form identifier number must be assigned and entered on each Form 1042-S in the box provided at the top of the form. This number will help the IRS later identify which Form 1042-S is being corrected or amended with respect to the same recipient. The identifier must be numeric, exactly 10 digits, and cannot be the U.S. or foreign TIN of the recipient.

Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, is filed to report to the IRS tax withheld on certain income (including IRA distributions) to foreign persons, including nonresident aliens. Financial organizations that file Form 1042-S are required to file Form 1042. Form 1042 must be filed with Forms 1042-S by March 15 of the year following the year of distribution.

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Beginning with 2014 reporting, financial organizations are required to file Form 1042-S electronically, regardless of the number of forms being filed. In previous years, financial organizations were allowed to file on paper if filing less than 250 forms. While this electronic filing threshold still applies to all other entities (e.g., universities making payments to foreign researchers), it no longer applies to financial organizations. If the financial organization fails to file electronically, a $50 per return penalty up to a maximum of $100,000 may apply, unless there is a reasonable cause for the failure.

Effective January 1, 2016, distributions of the same type of income (as determined by the income code in Box 1) made to multiple financial accounts held by the same account owner, must be reported on separate Forms 1042-S.

Penalties for Form 1042-S Reporting FailuresThe Trade Preferences Extension Act of 2015 increased the tiered penalty structure applicable to Form 1042-S reporting failures. These penalties are subject to annual cost-of-living adjustments. The same penalties apply to Form 1099-R reporting failures. See “Tiered Penalty Structure for Form 1099-R Failures” in Chapter 4, IRA Reporting, for the specific penalties.

Withholding for Expatriates

The Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008 contains several tax breaks for military personnel. To raise tax revenue to balance the lost-revenue cost of tax breaks contained in the legislation, several tax-related changes for expatriates were included and are addressed in IRC Sec. 877A. A U.S. citizen who relinquishes his citizenship or an immigrant who has lost permanent resident status is an “expatriate,” and is subject to special tax or withholding treatment for amounts held in tax-advantaged retirement accounts and IRAs.

According to IRC Sec. 877A(e)(1), for Traditional and Roth IRAs, the expatriate must treat the entire interest in his IRAs as having been received on the day before his expatriation date, and thus the IRA balance becomes subject to income tax for that year and becomes basis in the IRA. Further, the 10 percent early distribution penalty tax does not apply, and the expatriate must make appropriate adjustments to subsequent distributions from his IRAs to reflect the foregoing tax treatment (i.e., basis).

According to IRC Sec. 877A(d)(1), for retirement plan accounts, including simplified employee pensions (SEP) and savings incentive match plan for employees of small employers (SIMPLE) IRA plans, any distributions following the expatriation date are subject to mandatory withholding of 30 percent of the taxable amount.

Reporting ProceduresThe covered expatriate generally must provide the payer with Form W-8CE, Notice of Expatriation and Waiver of Treaty Benefits, which will notify the payer that the individual is a covered expatriate. This must be provided by the earlier of

• the day before the first distribution on or after the expatriation date, or

• 30 days after the expatriation date.

Within 60 days of receiving Form W-8CE, the payer must provide the covered expatriate with the fair market value of his account as of the day before the expatriation date. This amount is deemed distributed to the covered expatriate on the day before the expatriation date and must be included in the expatriate’s taxable income for the year. The payer does not report the deemed distribution on Form 1042-S or on Form 1099-R.

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The covered expatriate is responsible for tracking the basis created by the deemed distribution. The covered expatriate must file Form 8854, Initial and Annual Expatriation Statement, annually with her tax return.

Depositing and Reporting Withholding

Depositing Federal Tax WithholdingBefore 2011, nonpayroll withholding amounts reported on Form 945, Annual Return of Withheld Federal Income Tax, had been submitted to the IRS through a federal depository using Form 8109, Federal Tax Deposit Coupon. But most financial organizations now must deposit withholding amounts electronically through the IRS’ Electronic Federal Tax Payment System (EFTPS).

Final Treasury regulations were issued in 2010 in Treasury Decision 9507, eliminating the use of paper coupons (Form 8109) to remit federal income tax withholding to the IRS. These regulations were issued to effectuate system changes made by the Financial Management Service (FMS), a Bureau of the Treasury Department. FMS has eliminated the system that enabled the processing of paper coupons, effective January 1, 2011.

For most remitters the use of EFTPS was required beginning January 1, 2011. Only those entities that remit less than $2,500 of withholding for a return period (one year for retirement arrangements) are allowed to use manual means. For IRA withholding, manual remittance is made with Form 945, which is filed annually.

Noncompliance PenaltyA financial organization that is required to use EFTPS, but does not, will be assessed a penalty for noncompliance. The penalty amount is a percentage of the amount of underpayment. The percentage is determined by the number of days the failure occurs (IRC Sec. 6656(b)). Although various IRS notices provided some penalty relief regarding first-time users of the EFTPS program, compliance has been required since July 1, 1999.

Enrolling in EFTPSThose depositors required to begin participating in the EFTPS program should have already been contacted by the IRS about entering the program. Depositors that are not required to participate in the program, but would like to, may voluntarily enroll. The IRS has a booklet on how to participate in EFTPS. IRS Publication 966, Electronic Federal Tax Payment System, provides information on the EFTPS.

Depositors can enroll in the IRS’ EFTPS program online, or can call the EFTPS helpline at 888-725-7879.

$2,500 De Minimis RuleOnly those financial organizations with a deposit liability of less than $2,500 during a return period may submit taxes with their quarterly or annual returns. For IRAs, that return is Form 945 which has an annual return period. Financial organizations submitting withholding of less than $2,500 on an annual basis may remit the withholding amount with Form 945 rather than submitting the withholding through the EFTPS.

Caution should be taken regarding this de minimis rule, however. If a financial organization assumes it will meet the $2,500 threshold and at some point during the year determines it will exceed the $2,500, the IRS may charge penalties for failure to make timely tax deposits.

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Determining Depositor StatusFinancial organizations must remit federal tax withholding on specific schedules as defined in the instructions to Form 945 and in Publication 15, (Circular E), Employer’s Tax Guide. According to Publication 15, a payer is classified as either a monthly or a semiweekly depositor based on the amount of withholding collected during the “lookback” period.

Lookback PeriodAn employer’s lookback period for determining depositor status is the calendar year two years before the current calendar year (Treas. Reg. 31.6302-4(c)(2)(iv)). For example, the 2018 lookback period is the calendar year 2016.

A new nonpayroll depositor will not be initially classified based on a lookback period. As a result, the depositor will be a monthly depositor for two years.

Monthly DepositorDepositors generally must determine their deposit schedules before the beginning of each calendar year. If the total tax reported during the lookback period is $50,000 or less, the depositor is considered a monthly depositor. A monthly depositor must deposit collected taxes by the 15th day of the month following the month during which the taxes were collected.

EXAMPLE: Local Credit Union reviews its lookback period for the 2018 calendar year to determine its depositor status for 2018. Records show that the withholding reported for the lookback period (2016 calendar year) was $18,000. Because the accumulated withholding reported during the lookback period is less than $50,000, the credit union is a monthly depositor.

Semiweekly DepositorDepositors who reported more than $50,000 in taxes withheld during the lookback period are considered semiweekly depositors. Semiweekly depositors must make deposits on Wednesdays and Fridays depending upon the day during which taxes are collected. Withholding collected on Wednesday, Thursday, or Friday should be deposited by the following Wednesday. Withholding collected on Saturday, Sunday, Monday, and Tuesday should be deposited by the following Friday. If the deposit deadline falls on a nonbanking day, such as a federal or state holiday, it is considered timely if deposited on the next banking day.

EXAMPLE: Local Credit Union noted that the amount of withholding has increased in recent years. Before 2018, Local Credit Union reviews its records to determine its depositor status for 2018. In 2016, withholding totaled $60,000. Because the total withholding reported for the 2018 lookback period (2016) exceeded $50,000, Local Credit Union will be a semiweekly depositor for 2018.

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$100,000 Next-Day Deposit RuleOne significant exception to the monthly or semiweekly depositor status is the $100,000 next-day deposit rule. The $100,000 next-day deposit rule states that if a depositor accumulates withheld taxes of $100,000 or more on any one day, those taxes must be deposited by the close of the next banking day. The depositor then begins again (the next day) to accumulate taxes and should follow the semiweekly depositor rules because a monthly depositor who accumulates $100,000 on any day immediately becomes a semiweekly depositor for the rest of the calendar year and for the next year.

EXAMPLE: Acme Bank and Trust opened in March 2018. For April, May, and June, Acme was a monthly depositor. On July 6, 2018, an IRA owner withholds $82,000 from an IRA distribution and on July 27, another IRA owner withholds $21,000 from a distribution. Because Acme accumulated $100,000 (or more) on July 27, it became a semi-weekly depositor on that date.

$2,500 ExceptionA depositor that accumulates less than $2,500 in taxes during a year may wait until it files Form 945 to deposit the taxes. Depositors who are unsure whether less than $2,500 will be accumulated generally should deposit under the monthly or semiweekly depositor rules to avoid a penalty for a failure to deposit should more than $2,500 be accumulated.

Reporting Annual WithholdingSince January 1, 1994, all nonpayroll withholding under IRC Sec. 3405 is reported on Form 945, Annual Return of Withheld Federal Income Tax. Financial organizations file Form 945 with the IRS to report the annual amount withheld for U.S. citizens and resident aliens. (See “Nonresident Alien Reporting” earlier for information on how to report annual withholding for nonresident aliens.)

Depositor Review

DepositorDetermination Amount

and PeriodDeposit Due

Monthly $50,000 or less reported during the lookback period

The 15th day of the following month

Semiweekly More than $50,000 reported during the lookback period

The following Wednesday and Friday

$100,000 Next-Day $100,000 accumulated in one day The next banking day

$2,500 Exception Less than $2,500 accumulated during the year

Pay when filing Form 945

IRA Withholding • 65

Form 945 generally is due to the IRS by January 31 of the year following the year the taxes are withheld. If January 31 falls on a Saturday, Sunday, or legal holiday, Form 945 is due the following business day. But if deposits are made on time and in full, the due date for filing Form 945 is February 10 rather than January 31. Nonpayroll withholding includes withholding on pensions, annuities, IRAs, gambling winnings, Indian gaming profits, military retirement, and backup withholding. Beginning in January 2014, Form 945 may be filed electronically.

Some payers must file Form 945-A, Annual Record of Federal Tax Liability, in addition to Form 945, depending upon the payer’s withholding depositor status. Monthly payroll withholding depositors file only Form 945, which lists the amount of nonpayroll withholding collected for each month. Semiweekly payroll withholding depositors, however, also file Form 945-A with Form 945 to report nonpayroll withholding. Form 945-A reports the amount of nonpayroll withholding collected each day. The IRS uses Form 945-A to match the tax liability to deposits to determine if the withholding tax liabilities have been timely deposited.

State Withholding

In addition to federal withholding, some states require withholding of state income taxes from IRA distributions. A financial organization is required to comply with the state’s withholding requirements if both of the following apply.

• The financial organization has an office or branch office in a state where state withholding is required.

• The recipient of the IRA distribution is a state resident or is required to file an income tax return in that state.

Financial organizations should check with the state department of revenue to determine if state withholding applies to IRAs that they administer.

The rate at which income taxes are withheld varies from state to state. In some states, the IRA owner or beneficiary may not waive state withholding if federal taxes are withheld from the distribution. When state withholding applies and the individuals are allowed to make an election, financial organizations should obtain the election in writing.

Following is a brief summary of the general state-specific IRA withholding amounts.

66 • IRA Withholding

317-SU (Rev. 12/2017) ©2018 Ascensus, LLC

State Income Tax Withholding Guide for IRA DistributionsThis guide is designed to provide general information about state withholding requirements for IRA distributions. It is not intended to provide a complete overview of state withholding rules and regulations. The information in this guide was obtained from state revenue authorities and every effort has been made to ensure its accuracy. Because state tax laws are subject to constant change, often without prior notice, the accuracy of the information cannot be guaranteed beyond the revision date of this guide.

General RulesIn most cases, state withholding applies to state residents only. In Maine, Massachuse� s, Montana, Nebraska, Oregon, and Wisconsin, state withholding also applies to individuals required to fi le a state tax return in that state.If a state withholding elec� on is not made and state withholding is required, state tax will be withheld.A state withholding elec� on may be changed at any � me, applicable to payments made a� er the change.

State Specifi c RulesARKANSAS. IRA distribu� ons are subject to state withholding at 3.0% of the gross payment unless the IRA owner elects no state withholding.

CALIFORNIA. IRA distribu� ons are subject to state withholding at 1.0% of the gross payment unless the IRA owner elects no state withholding.

CONNECTICUT. Taxable lump-sum IRA distributions are subject to mandatory state withholding at 6.99% of the gross payment. Any other taxable distribution from an IRA is subject to state withholding at 6.99% of the gross payment, unless the IRA owner furnishes the financial organization with a completed Form CT-W4P. Form CT-W4P may be obtained from the Connecticut Department of Revenue Services.

DISTRICT OF COLUMBIA. Lump-sum IRA distribu� ons are subject to mandatory state withholding at 8.95% of the gross payment, except for any a� er-tax amount in a lump-sum distribu� on or a trustee-to-trustee transfer between IRAs.

IOWA. IRA distribu� ons are subject to state withholding at 5.0% of the gross payment if federal income taxes are withheld from the payment.

KANSAS. IRA distribu� ons are subject to state withholding at 5.0% of the gross payment if federal income taxes are withheld from the payment or if the IRA owner requests state withholding in wri� ng.

LOUISIANA. IRA distribu� ons are subject to state withholding only when the IRA owner elects state withholding and specifi es a percentage not to exceed 4.8% of the gross payment.

MAINE. IRA distribu� ons are subject to state withholding at 5.0% of the gross payment if federal income taxes are withheld from that payment.

MASSACHUSETTS. IRA distribu� ons are subject to state withholding at 5.10% of the gross payment if federal income taxes are withheld from the payment. (EXCEPTION: A payment is not subject to state withholding if it is excluded from taxa� on under Massachuse� s law.)

MICHIGAN. Any taxable distribu� on from an IRA received by an IRA owner or benefi ciary born a� er December 31, 1945, is subject to state withholding at 4.25% of the gross payment, unless the IRA owner provides the fi nancial organiza� on with a completed Form MI W-4P. Withholding also applies to any taxable distribu� ons received by an IRA owner or benefi ciary born before 1946 that exceeds certain income thresholds. Withholding is not required on qualifi ed distribu� ons from Roth IRAs. Form MI W-4P may be obtained from the Michigan Department of Treasury.

MONTANA. IRA distribu� ons are subject to state withholding when an IRA owner elects state withholding and specifi es an amount. If state withholding is elected, the fi nancial organiza� on is not required to withhold the amount specifi ed if it would result in a net payment of less than $10.

NEBRASKA. IRA distribu� ons are subject to state withholding at 5.0% of the gross payment if federal income taxes are withheld from the payment or if the IRA owner requests state withholding in wri� ng.

NEW JERSEY. IRA distribu� ons are subject to state withholding when an IRA owner elects state withholding and specifi es an amount. The IRA owner must specify an even dollar amount. If state withholding is elected, the fi nancial organiza� on is not required to withhold the amount specifi ed if the withheld amount would be less than $10 (per payment).

NORTH CAROLINA. IRA distribu� ons are subject to state withholding at 4.0% of the gross payment unless the IRA owner furnishes the fi nancial organiza� on with a completed Form NC-4P. Form NC-4P may be obtained from the North Carolina Department of Revenue.

OKLAHOMA. IRA distribu� ons are subject to state withholding at 5.0% of the gross payment if federal income taxes are withheld from the payment or if the IRA owner requests state withholding in wri� ng.

OREGON. IRA distribu� ons are subject to state withholding at 8.0% of the gross payment unless the IRA owner elects no state withholding.

VERMONT. IRA distribu� ons are subject to state withholding at 2.4% of the gross payment if federal income taxes are withheld from the payment or if the IRA owner requests state withholding in wri� ng.

WISCONSIN. IRA distribu� ons are subject to state withholding when an IRA owner elects state withholding and specifi es an amount. If state withholding is elected, the fi nancial organiza� on is not required to withhold the amount specifi ed if the withheld amount would be less than $5 (per payment).

IRA Withholding • 67

Withholding Election Log Sheet

Financial organizations may use (and revise as necessary) the Withholding Election Log Sheet to track an IRA owner’s withholding elections. As discussed earlier, IRA owners may make withholding elections each time they take IRA distributions. But if no election is made at the time of a distribution, financial organizations must apply the last withholding election they find on file for the IRA owner (or beneficiary). This log sheet tracks federal income tax withholding for each IRA owner and should be retained in the IRA owner’s file. A withholding checklist that tracks a financial organization’s withholding notices and remittance to the IRS is found in Chapter 5, Performing an Audit.

Some financial organizations may wish to revise this log sheet to also record state income tax withholding elections.

©2018 Ascensus, LLC

Withholding Election Log Sheet

Financial organization name ________________________________________________________________________

Client name _____________________________________________________________________________________

Address _________________________________________________________________________________________

_________________________________________________________________________________________

Telephone _______________________________________________________________________________________

IRA Type

Traditional

Roth

Withholding Election

Date ______________________________

Election: Waive withholding

Withhold 10%

Withhold more than 10% Amount ____________________

Withholding Election Change

Date ______________________________

Election: Waive withholding

Withhold 10%

Withhold more than 10% Amount ____________________

Date ______________________________

Election: Waive withholding

Withhold 10%

Withhold more than 10% Amount ____________________

Date ______________________________

Election: Waive withholding

Withhold 10%

Withhold more than 10% Amount ____________________

IRA Reporting • 69

Chapter 4

IRA ReportingIRA Reporting Requirements

Filing IRS Information Returns

Form 5498 Contribution Reporting

Form 1099-R Distribution Reporting

IRA Contributions and Distributions

IRA-to-IRA Transfers and Rollovers

Retirement Plan Rollovers

Recharacterizations

Conversions

Excess Contributions

Military and Disaster-Related Contributions

Endowment Contract IRAs

IRA Revocations or Account Closures

Mergers and Acquisitions

Reporting Corrections

Fair Market Value Statements

Account Statements

Required Minimum Distribution Statements

IRA Reporting Activity Log Sheet

IRA Reporting Requirements

One of the most important compliance areas of IRA administration is reporting. Laws and regulations require certain reports to be sent to IRA owners and other reports to be submitted to the IRS. The IRS can charge financial organizations penalties for improper reports and for neglecting to file required reports. The IRS may discover these errors on information returns they receive and can discover them when doing financial organization audits.

At the time of this writing, the IRS had not yet released the 2018 versions of Forms 5498 and 1099-R.

70 • IRA Reporting

Reporting IRA contributions or distributions generally is the closest contact that a financial organization has with the IRS each year. Consistently filing incorrect information returns is a red flag to the IRS, alerting the IRS to a financial organization that may be having problems in other areas as well. Financial organizations must be aware of current reporting procedures.

Financial organizations also must generate fair market value statements, account statements, and required minimum distribution (RMD) statements each year. While the IRS does not receive copies of these reports, errors may be discovered in an IRS audit.

Many financial organizations have their IRA reporting done by data processing firms or IRA administration companies or through their own in-house computer systems. Some of these financial organizations may tend to ignore reporting requirements or changes, opting instead to trust that the entity or person generating the reports will keep abreast of reporting requirements.

Financial organizations must keep in mind that as IRA trustees, custodians, and issuers, they are responsible for any penalties imposed for incorrect reporting. Whenever reporting is generated outside of the IRA department, the IRA administrator should be familiar enough with the reporting requirements to be able to spot-check at least 10 percent of the reports for accuracy.

Gathering Reporting InformationCurrent and correct transaction forms, such as IRA contribution, distribution, and rollover forms, are a financial organization’s most important ally in maintaining compliance with respect to reporting. IRA administrators must gather the correct information at the time of the IRA transaction to ensure proper reporting. If the proper information is not contained in the records, financial organizations may have difficulty trying to gather the information at the time reports are being prepared.

The forms a financial organization uses should request all the information necessary for generating required reports. Many of the general forms (not IRA specific) used by financial organizations do not ask for the specific information that is needed for reporting IRA transactions.

Reporting DeadlinesIRA reporting deadlines are scattered throughout the calendar year. Financial organizations should know when each report is due, who is to receive the report, and what information is required to be reported.

Although most deadlines fall on the same date each year, the deadlines for filing forms occasionally may fall on a date on which regular business is not conducted by financial organizations or the U.S. Postal Service. IRC Sec. 7503 indicates that when the last day prescribed under the authority of the internal revenue laws for performing an act falls on a Saturday, Sunday, or legal holiday, the execution of such act will be considered timely if it is completed on the next day that is not a Saturday, Sunday, or legal holiday. Note that IRC Sec. 7503 does not grant an extension; it is simply an authorization to complete a transaction on the next day that regular services may be conducted.

The definition of a legal holiday in IRC Sec. 7503 includes a state holiday or a holiday recognized by the District of Columbia. Accordingly, when the tax return due date falls on a Saturday, Sunday, or legal holiday, the tax return due date is deemed to be the next day that the IRS office where the return must be filed is open for business.

IRA Reporting • 71

Filing IRS Information Returns

Two of the most common information returns filed by financial organizations are Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., used to report IRA distributions, and Form 5498, IRA Contribution Information, used to report IRA contributions. IRS forms must be filed on time or a financial organization could be subject to a monetary penalty for each form that is filed late. The filing deadlines are stated in the specific instructions for the forms.

Form 1099-R generally is due to IRA owners and beneficiaries (if applicable) by January 31, and to the IRS by February 28 if filing on paper and March 31 if filing electronically. The deadline for providing Form 5498 to IRA owners and filing it with the IRS generally is May 31. If a deadline falls on a Saturday, Sunday, or legal holiday, the deadline is extended to the following business day (IRC Sec. 7503).

Filing Extensions for IRS ReportsWhen necessary, financial organizations file Form 8809, Application for Extension of Time to File Information Returns, to request an extension of time for filing reports with the IRS. Form 8809 is used to request an extension for filing many forms, including the Forms 1099 and 5498 series, and Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.

Financial organizations file Form 8809 to apply for a 30-day filing extension. Form 8809 instructions indicate the extension request should be filed as soon as it is known that an extension is necessary, but must be filed by the due date of the return; extensions cannot be granted if requests are filed after the due date of the original returns. Extensions are granted for only 30 days at a time. If additional time is needed, another Form 8809 should be filed before the end of the first extension period.

Methods of Submitting Extension RequestThe instructions for Form 8809 and IRS Publication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G, specify three methods for filing Form 8809.

• Electronic file transmission through the IRS’ Filing Information Returns Electronically (FIRE) system

• Completing and submitting the online fill-in Form 8809 within the FIRE system

• Completing and mailing or faxing a hard copy Form 8809

The submission requirements for each method are described in IRS Publication 1220. When submitting through electronic file transmission, the transmitter will receive the file status results online. When using the online fill-in form, acknowledgment is automatically displayed online. For paper submissions, the payer will receive a letter from the IRS.

NOTE: According to Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, requests on Form 8809 for an extension of time to file Form 1042–S must be made electronically if the request is for more than one payer.

72 • IRA Reporting

Automatic 30-Day ExtensionTreasury regulations allow an automatic 30-day extension for filing certain information returns, including Forms 1099-R and 5498, with the IRS (Treas. Reg. 1.6081-8T). The regulations apply to filers of all types—paper and electronic.

To receive the automatic 30-day extension, the financial organization must file Form 8809 timely. No signature or explanation is required on Form 8809 to obtain the automatic extension. As a result, a financial organization that completes the remaining portions of Form 8809 properly and files Form 8809 on or before the date prescribed for filing the particular information return will automatically qualify for the 30-day extension (Treas. Reg. 1.6081-8T(a)(1)).

Financial organizations that need an additional extension beyond the automatic 30 days must apply for the additional extension. As defined in Treas. Reg. 1.6081-8T(a)(2), one additional 30-day extension may be allowed if the filer submits a request before the expiration of the automatic 30-day extension.

Note that the automatic extension of time to file and any approved requests for additional time to file will not extend the due date for providing information returns to recipients. IRS Publication 1220 specifically states that Form 8809 cannot be used to request an extension for recipient delivery.

Required InformationThe general information needed to submit the request on Form 8809 is as follows.

• Filer name, address, tax identification number, contact name, and telephone number

• Method of filing (paper or electronic)

• Identification of the form type

• Reason for the needed extension if the automatic extension has already once been received

• Signature of the requestor or other authorized person (if necessary)

Extensions may be requested for only one tax year at a time. A separate Form 8809 should be used for each method of filing (i.e., on paper or electronically). If requesting an extension to file more than one type of return (e.g., Form 1099-R and Form 5498), only one Form 8809 need be submitted as long as the method of filing is the same and the request is filed by the earliest due date. But more than one Form 8809 may be filed to avoid any associated problems.

IRA Reporting • 73

IRS Form 8809Form 8809 and the instructions may be found at the IRS website.

74 • IRA Reporting

Filing Extensions for Recipient CopiesIRS Publication 1220 explains procedures to request an extension for providing copies of Forms 1099-R and 5498 to recipients. Financial organizations may request an extension of time by submitting a letter to the IRS at the IRS address described in Publication 1220. Neither the paper Form 8809 nor the online fill-in Form 8809 extension option can be used to request an extension of time to deliver statements to recipients. The following information must be addressed in the letter.

• Payer or employer name

• Payer or employer TIN

• Payer or employer address

• Type of information return

• Statement that the extension request is to provide information returns to recipients

• Reason for the extension request

• Signature of payer or authorized person

The letter request must be postmarked no later than the return due date to recipients. Requests for late delivery to recipients are not automatically approved. If approved, the IRS will allow for an extension of up to 30 days from the due date of the return. (See Publication 1220 for more details.)

Methods of Filing Information ReturnsThe IRS provides different methods for financial organizations to file information returns, including Forms 1099-R and 5498. The allowed methods are filing paper forms (which the IRS scans during processing) or filing electronically. Depending on the quantity of returns being filed, a financial organization may be required to file information returns, including corrected returns, electronically.

Paper forms and their associated instructions may be accessed at the IRS website. Some forms, including Forms 1099-R and 5498, are posted at the website for information purposes only and may not be downloaded and filed with the IRS. Financial organizations can obtain official IRS forms by calling 800-829-3676. Instructions on how to file electronically are contained in IRS Publication 1220, which also may be accessed at the IRS website. IRS paper forms and publications also can be obtained from any IRS district office.

Filing ElectronicallyFinancial organizations that file 250 or more of a return are required to file those returns electronically. The IRS does, however, encourage all filers to file electronically even if filing fewer than 250 returns. Returns are filed using the IRS’ FIRE system as explained in Publication 1220.

Form 1099-R and 5498 FilingFinancial organizations applying to use electronic filing for the first time must complete Form 4419, Application for Filing Information Returns Electronically (FIRE), generally no later than 45 days before the form’s due date (e.g., Forms 1099-R and 5498). A single Form 4419 is used to apply for electronic filing of any of the following forms (or series of forms): 1097, 1098, 1099, 3921, 3922, 5498, W-2G, 1042-S, 8027, and 8955-SSA. The IRS will act on an application and notify the applicant of authorization to file. The instructions for Form 4419 advise financial organizations to contact the IRS if they do not receive a response within 45 days. Returns may not be submitted until the application has been approved.

IRA Reporting • 75

Electronic Delivery of Forms 1099-R and 5498 to RecipientsIRS Notice 2004-10 announced that filers of the Forms 1099 and 5498 series may provide recipient statements electronically. The General Instructions for Certain Information Returns (Forms 1096, 1097, 1098, 1099, 3921, 3922, 5498, and W-2G) generally indicate which forms may be delivered electronically to recipients.

Financial organizations may provide the required forms electronically to IRA owners and beneficiaries if they satisfy the consent, format, posting, and notification requirements in part M of the general instructions. The recipient must consent to receiving the forms electronically before the statements can be provided electronically.

A statement that includes specific information as indicated in Part M of the general instructions must be sent to the recipient, and the recipient must consent to receiving the forms electronically before the forms can be provided electronically. The consent must be made electronically to show that the recipient can access the forms in the electronic format in which they will be provided. The forms may not continue to be delivered electronically if the recipient withdraws consent.

Once the process is in place, recipients must be notified of any hardware or software changes before subsequent Forms 1099-R and 5498 can be delivered electronically. A new consent to receive the forms electronically is required after the new hardware or software is put into service.

WaiversIf a payer is required to file electronically but fails to do so and does not have an approved waiver on record, the payer will be subject to a penalty of $100 per return in excess of 250 returns. Waivers for filing reports electronically are granted on a case-by-case basis by submitting Form 8508, Request for Waiver From Filing Information Returns Electronically. One Form 8508 may be submitted for multiple types of returns. These waiver requests must be filed at least 45 days before the due date of the returns.

Electronic filers may request an automatic waiver from filing Forms 5498 electronically for combat zone participants by submitting Form 8508. See the Instructions for Forms 1099-R and 5498 for more information.

Filing on PaperFinancial organizations that are not required to file electronically should refer to the General Instructions for Certain Information Returns for details on the paper document reporting requirements. Those that do file on paper must use IRS Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to transmit paper Forms 1099-R and 5498 to the IRS. A separate Form 1096 must be used for each type of return transmitted to the IRS (e.g., all paper Forms 1099-R are sent to the IRS with one Form 1096 and all paper Forms 5498 are sent to the IRS with a separate Form 1096).

76 • IRA Reporting

IRS Form 1096The Form 1096 may be found at the IRS website. The IRS does not allow financial organizations to file Copy A of the form printed from the website.

IRA Reporting • 77

Substitute FormsSubstitute forms are designed to substitute as the official IRS form and must meet specific IRS requirements. The IRS permits qualified substitutes for Forms 1099-R and 5498 to be used for annual reporting if they meet the requirements found in Revenue Procedure 2015-35, also reproduced as Publication 1179, General Rules and Specifications for Substitute Forms 1096, 1098, 1099, 5498, and Certain Other Information Returns. Specifications for forms to be sent to the IRS and forms to be sent to the IRA owners are included in Publication 1179.

Substitute Forms to the IRSMost financial organizations file their information returns with the IRS electronically. Financial organizations that file 250 or more returns generally must file electronically, but the IRS encourages electronic filing even for those that file fewer than 250 returns. Financial organizations that file paper forms with the IRS must be aware that, according to Publication 1179, the copy filed with the IRS must be an exact replica of the official IRS form with respect to layout and content. The publication gives specific measurements for each box on the form and each word used. It also dictates specific paper qualities, ink, and typography.

Substitute Forms to the RecipientFinancial organizations may choose to send paper Forms 1099-R and 5498 to their IRA owners. Often, they will choose to print substitute forms. Publication 1179 indicates that substitute forms sent to IRA owners (or to IRA beneficiaries) must meet the following requirements.

• The tax year, form number, and form name must be the same as the official form and must be prominently displayed together in one area of the statement (e.g., they may be shown in the upper right portion of the statement).

• The financial organization’s (payer’s) and recipient’s identifying information (e.g., name and tax identification number) required on the official form must be included.

• Payers issuing substitute forms generally must provide the telephone number of an individual who can answer questions about the statement.

• All applicable money amounts and information, including box numbers, required to be reported must be titled on the substitute statement in substantially the same manner as on the official IRS form.

• The financial organization must provide appropriate instructions to the IRA owner or beneficiary similar to those on the official IRS form to aid in the proper reporting of items on his income tax return.

• If using carbonless sets used to produce substitute forms, the quality of each copy must meet the following standards: be clearly legible, all copies must be able to be photocopied, and fading must not diminish legibility and the ability to photocopy.

• If federal income tax is shown in Box 4 of Form 1099-R, the recipient must receive Copy B, to be sent in with the IRA owner’s tax return. Copy B must contain the following statement, “Report this income on your federal tax return. If this form shows federal income tax withheld in box 4, attach this copy to your return.” and Copy C must contain the following statement, “This information is being furnished to the Internal Revenue Service.”

• The substitute Form 5498 (Copy B) must contain the following statement, “This information is being furnished to the Internal Revenue Service.”

78 • IRA Reporting

See IRS Publication 1179 for more specific information on reporting requirements and for remitting substitute forms to the IRS.

Account Number Box on FormsAccording to the General Instructions for Certain Information Returns, when filing on paper (not electronically) more than one information return of the same type for a recipient who has multiple accounts with the financial organization (e.g., more than one Form 5498 or more than one Form 1099-R), the account number must be provided on each form. Otherwise, including an account number is optional, but the IRS states that using unique account numbers ensures that corrected information returns will be processed accurately. The general instructions also indicate that the account number cannot appear anywhere else on the form. For example, the IRA owner’s Social Security number appears on the form, and therefore, cannot also be used as the account number.

Publication 1220 indicates that if filing electronically, unique separate account numbers must be included for each information return of the same type for the same recipient, regardless of whether the recipient has multiple accounts.

Truncating Identification Numbers on Payee StatementsThe IRS released Treasury Decision (TD) 9675 in 2014 that modified and made permanent a pilot program that permitted payers of Forms 5498 and 1099-R to truncate identification numbers on payee copies. This program was first introduced in IRS Notice 2009-93 (later modified and extended by Notice 2011-38) as a temporary pilot program aimed at reducing the incidence of identity theft. It allows organizations that file Forms 5498 and 1099-R to shorten to four digits the Social Security numbers (SSNs) and individual taxpayer identification numbers (ITINs) appearing on the copies sent to owners of the accounts (Copy B). The information return copies that are filed with the IRS or with state and local governments, however, must include a full identifier that is not truncated.

The regulations and the General Instructions for Certain Information Returns provide that to truncate the identification numbers, the first five digits of the nine digit identification numbers are replaced with asterisks (*) or Xs. For example, a Social Security number with the last four digits of 1234 may be truncated as ***-**-1234 or as XXX-XX-1234.

The final regulations were effective July 15, 2014, for statements due after December 31, 2014.

Combined Federal/State Filing ProgramThis chapter explains the IRS federal reporting requirements for IRAs. Some states, counties, and cities with local income taxes also require that financial organizations report IRA information. Just like the IRS, state revenue authorities can impose substantial fines and penalties for failing to meet their requirements. Financial organizations should check with their state and local tax authorities or revenue departments for specific information on state reporting.

The IRS has a Combined Federal/State Filing Program under which it forwards information to many states that require reporting. Financial organizations must file electronically to participate in this program, and must file a test electronic file to receive approval to participate. IRS Publication 1220 identifies the states that participate in the program. In this program, the IRS will forward an approved financial organization’s federal reporting, including Form 1099-R and Form 5498, to the appropriate state agency.

IRA Reporting • 79

Form 5498 Contribution Reporting

IRS Form 5498, IRA Contribution Information, is used to report all types of Traditional and Roth IRA contributions (e.g., regular contributions, rollovers, conversions, recharacterizations), with the exception of IRA transfers. Also reported on Form 5498 is the fair market value (FMV) of an IRA, whether required minimum distributions (RMDs) are required, certain postponed contributions, and repayments of certain military or disaster related distributions. Financial organizations must file Form 5498 with the IRS by May 31 following the year to which the report applies. If May 31 falls on a Saturday, Sunday, or legal holiday, the Form 5498 is considered filed on time if it is filed on the following business day. IRS Publication 1179 provides the requirements for using substitute reporting forms, including guidelines for substitute Forms 5498.

Financial organizations should note that one IRA may hold many different investments (e.g., CDs, mutual funds, stocks). It is not correct to file a separate Form 5498 for each investment. For example, Joe opens one IRA document. Every year, Joe makes a contribution that is invested in a new CD. Although Joe has four CDs in his IRA, he receives only one Form 5498 showing any contributions made and the aggregated December 31 FMV of all the CDs.

Form 5498The specific copies that make up Form 5498 are to be filed with the IRS and the IRA owner or beneficiary (if applicable) and should be retained by the financial organization. Form 5498 also includes instructions for recipients and instructions for the financial organization. The IRS provides detailed instructions separately in the Instructions for Forms 1099-R and 5498, and additional instructions on selected topics in the General Instructions for Certain Information Returns. This form (for informational purposes) and the instructions can be found at the IRS website.

The IRS updates Form 5498 and the instructions annually, and sometimes changes the reporting requirements. Financial organizations whose computer systems generate Forms 5498 should pay close attention to changes each year so that the computer systems are reprogrammed for the changes.

Many types of contributions are reported on Form 5498, including regular contributions, rollovers, Roth IRA conversions, and recharacterizations. More than one type of contribution may be reported on the same Form 5498 for the same taxpayer if those contributions are made to the same IRA. For example, for an individual who makes both regular contributions and rollover contributions to the same IRA in the same year, the financial organization may report both the regular and rollover contributions on one Form 5498 in different boxes.

80 • IRA Reporting

Form 5498Following is Copy A of the 2017 Form 5498. Specific information on what to report in the individual boxes can be found in the Instructions for Forms 1099-R and 5498. Details on how to report specific types of contributions on Form 5498 are described throughout this chapter.

NOTE: At the time of this writing, the IRS had not yet released the 2018 version of Form 5498 and its instructions.

Changes to the 2017 Form 5498In addition to updated years and deadlines, the IRS made a few changes to the Form 5498 instructions. The most notable change pertains to the self-certification of late rollovers. The IRS revised the Form 5498 instructions to address IRA distributions that are rolled over beyond the 60-day rollover period and for which IRA owners have self-certified their eligibility for late rollovers as defined in Rev. Proc. 2016-47. The IRS requires that these self-certified late rollovers be reported in Boxes 13a, Postponed contribution, and 13c, Code. These boxes also are used to report postponed contributions of IRA owners who serve in combat zones, hazardous duty areas, and those affected by federally designated disasters. The IRS specifically states not to report late rollovers in Box 2, Rollover contributions. (See “IRA Owner Self-Certification of Late Rollover” in this chapter for more information on the self-certification rollover waiver.)

NOTE: The IRS confirmed to Ascensus that self-certified late rollovers that occurred in 2016 should be reported on the 2016 Form 5498 in Box 2, Rollover contributions. They should not apply the 2017 Box 13 reporting for self-certification of late rollovers on 2016 Forms 5498.

The Instructions for Forms 1099-R and 5498 also clarified that the previous year’s December 31 fair market value must include the amounts reported in Boxes 15a, FMV of certain specified assets, and 15b, Code(s), which are used to report hard-to-value assets.

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Penalty for Form 5498 Failures

The General Instructions to Certain Information Returns indicate that failure to provide a Form 5498 results in a $50 penalty for each failure, with no maximum, unless the failure is because of reasonable cause (IRC Sec. 6693).

Form 1099-R Distribution Reporting

Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., is used to report distributions from IRAs and from certain retirement plans. It includes copies to be filed with the IRS, the state and local tax departments, and the IRA owner or beneficiary (if applicable), and includes instructions for recipients and for the payer (the financial organization or entity generating the report for the financial organization). The IRS also provides detailed instructions separately in the Instructions for Forms 1099-R and 5498, and additional instructions on selected topics in the General Instructions for Certain Information Returns. This form (for informational purposes) and the instructions can be found at the IRS website.

The IRS updates Form 1099-R and the instructions annually, and sometimes changes the reporting requirements. Financial organizations whose computer systems generate Forms 1099-R should pay close attention to changes each year so that the computer systems are reprogrammed for the changes.

Form 1099-RFollowing is Copy A of the 2017 Form 1099-R. Specific information on what to report in the individual boxes can be found in the Instructions for Forms 1099-R and 5498. Details on how to report specific types of distributions on Form 1099-R are described throughout this chapter.

NOTE: At the time of this writing, the IRS had not yet released the 2018 version of Form 1099-R and its instructions.

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Tiered Penalty Structure for Form 1099-R FailuresA tiered penalty structure applies for failures to file Forms 1099-R with the IRS (IRC Sec. 6721). A penalty may apply if a financial organization fails to timely file Forms 1099-R, fails to include the information required to be shown on Forms 1099-R, or includes incorrect information on Forms 1099-R. The penalty amount generally depends upon whether the financial organization files or corrects the form with the IRS within 30 days of the due date, more than 30 days after the due date but by August 1, or after August 1 (or returns are not filed at all). This tiered penalty structure also applies to Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, failures.

Small businesses have a reduced calendar year cap on penalty failures. A business is considered a small business if its average annual gross receipts for the three most recent tax years (or for the period the business is in existence, if shorter) ending before the calendar year in which the information returns were due are $5 million or less.

The Trade Preferences Extension Act of 2015 increased the tiered penalties, which are subject to annual cost-of-living adjustments. In addition, the IRS explains that the tiered penalties are subject to cost-of-living adjustments in its article, “Increase in Information Return Penalties,” at the IRS website. The most current tiered penalty fees are shown in the table below and are stated in the General Instructions for Certain Information Returns.

Corrected 2016 Forms 1099-R/1042-S Failures (returns due January 1 – December 31, 2017)

2017 Forms 1099-R/1042-S Failures (returns due January 1 – December 31, 2018)

2018 Forms 1099-R/1042-S Failures (returns due January 1 – December 31, 2019)

within 30 days $50 per return; $532,000 maximum ($186,000 small business maximum)

$50 per return; $536,000 maximum ($187,500 small business maximum)

$50 per return; $547,000 maximum ($191,000 small business maximum)

after 30 days but on or before August 1

$100 per return; $1,596,500 maximum ($532,000 small business maximum)

$100 per return; $1,609,000 maximum ($536,000 small business maximum)

$100 per return; $1,641,000 maximum ($547,000 small business maximum)

after August 1 $260 per return; $3,193,000 maximum ($1,064,000 small business maximum)

$260 per return; $3,218,500 maximum ($1,072,500 small business maximum)

$270 per return; $3,282,500 maximum ($1,094,000 small business maximum)

For the intentional disregard of the filing and correction deadlines, the tiered penalty fees are higher and without limitation. The following chart highlights those amounts for tax years 2016, 2017, and 2018.

2016 Forms 1099-R/1042-S Failures (returns due January 1 – December 31, 2017)

2017 Forms 1099-R/1042-S Failures (returns due January 1 – December 31, 2018)

2018 Forms 1099-R/1042-S Failures (returns due January 1 – December 31, 2019)

$530 per return; no maximum $530 per return; no maximum $540 per return; no maximum

NOTE: IRS Publication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G, instructs financial organizations to submit corrected returns for returns filed within the last three calendar years.

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Penalty ExceptionsFinancial organizations and reporting entities may not be subject to all or part of the tiered penalties in certain circumstances, as explained in the General Instructions for Certain Information Returns.

Reasonable CauseThe penalty will not apply for any failure that was due to reasonable cause and not to willful neglect (IRC Sec. 6724(a)). The financial organization or reporting entity must be able to show that the failure was because of an event beyond its control or because of significant mitigating factors. It also must be able to show that it acted in a responsible manner and followed steps to avoid the failure.

Inconsequential Error or OmissionThe penalty will not apply if failure was because of an inconsequential error or omission that does not prevent or hinder the IRS from processing the return, from correlating the information required to be shown on the return with that shown on the payee’s tax return, or from otherwise putting the return to its intended use.

Errors and omissions that are never inconsequential are those related to a Social Security number or tax identification number, a payee name, and any money amount.

De Minimis RuleIf the reporting entity cannot show reasonable cause, the tiered penalties will not apply to a certain number of returns if all the following conditions are met.

• The forms were filed timely.

• The forms failed to include all the required information or included incorrect information.

• Corrections were filed by August 1 of the year in which the reports were required to be filed.

According to IRS Sec. 6721(c)(2), if all of these de minimis rules apply, the penalties for filing incorrect returns will not apply to the greater of 10 information returns, or one-half of one percent (.5 percent) of the total number of information returns required to be filed for the calendar year.

Safe Harbor for De Minimis ErrorsThe Protecting Americans from Tax Hikes (PATH) Act of 2015, part of the Consolidated Appropriations Act of 2016, was signed into law in December 2015. It created a safe harbor for de minimis errors in certain information returns filed with the IRS or in payee statements provided to recipients—including in Forms 1099-R and 1042-S. In most cases, a distribution amount error of $100 or less, or a withholding amount error of $25 or less, does not need to be corrected by issuing a revised form.

The PATH Act provides that the de minimis safe harbor will not apply if a recipient makes an appropriate election. The effect of such election requires the financial organization to either correct the reporting error or be subject to normal IRS penalties for incorrect reporting.

The IRS released Notice 2017-09 in January 2017. This notice explains the requirements that recipients must meet when requesting a corrected payee statement. Notice 2017-09 provides the requirements for a recipient to make the election, and further clarifies that the safe harbor does not apply if the organization’s error is intentional, or an information return or payee statement is not filed at all. (In other words, the de minimis element does not function as a filing waiver if the amount to be reported is below the $100/$25 thresholds.)

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The following conditions apply to the making of such recipient elections.

• The financial organization may prescribe “any reasonable manner” for making the election—including making the election in writing, online, or by phone (a recipient may submit a mailed written election if the organization fails to prescribe a method).

• An election made in a given calendar year will apply to information returns/payee statements provided in that year (e.g., an election made in 2018 would apply to 2017 Forms 1099-R that are provided in January 2018). A recipient may indicate that the election will be “durable,” and apply beyond the year of making the election.

• A recipient may revoke such election at any time.

• The election should include the recipient’s name, address, SSN or TIN, the account, and type of statement to which the election applies. If the recipient does not indicate the account number, the statement type, and the duration of the election, the organization should assume that the election applies to all of the recipient’s accounts, to all statements associated with those accounts, and that the election is for the election year and following years.

Notice 2017-09 applies to information returns and payee statements required to be provided after December 31, 2016. Notice 2017-09 indicates that regulations are expected to be issued incorporating the guidance in this notice. As of this writing, regulations had not been issued.

Proposed Regulations Extend Definition of Prompt Correction of Form 1099-RProposed Treasury regulation REG-141669-02, issued in 2003, proposes to revise Treas. Reg. 301.6724-1(d), which defines when a correction for Form 1099-R information return is considered prompt for purposes of establishing reasonable cause to waive the penalty. As proposed, the regulations expand the time intervals during which corrections must be made, thus allowing filers who must correct a large number of information returns to “bundle” their corrections and submit them less frequently than current rules allow. Although the proposed effective date of the proposed regulations is set as the date the IRS issues them as final regulations, filers may cite these rules for purposes of requesting a reasonable cause waiver before the regulations become final.

The proposed regulations generally provide that information returns would be deemed promptly corrected if corrected

• within 30 days of the required filing date,

• by August 1 following the required filing date,

• after August 1, by the date announced in other guidance such as forms and instructions, or electronic filing instructions, or

• within 30 days after the impediment or failure is discovered if not submitted within the time frames previously listed.

Notice 972CGThe IRS sends Notice 972CG, Notice of Proposed Civil Penalty, to financial organizations that have filed IRA reports with a missing or incorrect name/tax identification number (TIN). IRS Publication 1586, Reasonable Cause Regulations and Requirements for Missing and Incorrect Name/TINs, provides specific details on Notice 972CG. Notice 972CG proposes a penalty of $100 for each return not filed correctly. The listing should be compared with the filer’s records to determine if appropriate action was taken to meet the requirements for establishing reasonable cause.

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Notice 972CG may include proposed penalties for late filing or failure to file information returns through electronic transmission. If a notice includes these penalties, a written explanation must substantiate reasonable cause to have the proposed penalties waived.

The contents of Notice 972CG include

• an explanation of the proposed penalty;

• an explanation of how to respond to the notice;

• a record of each submission considered in the penalty, including the form type, date received (if not timely filed), whether the returns were original or amended, the transmitter’s control code (for electronic filers), and the type of penalty that applies (or penalties that apply);

• a summary of the proposed penalty, which takes into consideration all penalties proposed, and the maximum penalty amount that can be assessed under IRC section 6721; and

• a response page.

The response page and the payment slip are the only pages of the notice that should be returned to the IRS with proof of a request to the IRA owner to provide a TIN or with a written explanation supporting a reasonable cause of the error.

The financial organization should send in the portion of the payment slip that appropriately indicates whether it fully agrees, partially agrees, or totally disagrees with the proposed penalty. The payment slip should be signed in the space provided and payment included if the financial organization fully or partially agrees to the proposed penalties.

If a financial organization does not respond to Notice 972CG within 45 days (60 days for foreign payers), the IRS will assess the full amount of the proposed penalty and a balance due notice will be issued.

IRA Contributions and Distributions

Financial organizations are responsible for properly reporting IRA transactions and can be assessed penalties from the IRS for incorrect reporting. Whether a financial organization does its own reporting or has it done by other entities, Ascensus recommends that financial organizations be familiar enough with reporting requirements to spot-check at least 10 percent of the reporting for accuracy. Reporting errors that are discovered by the financial organization after the returns are sent to the IRS may be corrected following specific IRS correction procedures (described later in this chapter). Undiscovered or frequent errors, however, could prompt IRS questions and possibly an IRS audit.

Financial organizations should gather the correct information at the time of the IRA transaction to ensure proper reporting. In audit situations, the IRS does not view insufficient resources as a valid excuse for noncompliance. Most financial organizations use various IRA transaction forms to gather the information that is needed to ensure proper reporting. This may include forms that record IRA owner requests for contributions, distributions, transfers, rollovers, conversions, recharacterizations, and others. These transaction forms, retained in IRA owner files, will prove helpful if errors are discovered when spot-checking Forms 5498 and 1099-R.

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Following is a review of how to report common (and some uncommon) Traditional and Roth IRA transactions on paper Forms 1099-R and 5498. While this guidance is for paper reporting, electronic reporting through the IRS’ FIRE system is done similarly. See Publication 1220 for specific guidance on electronic reporting requirements. Financial organizations may use this information to help check their Forms 1099-R and 5498 before they are sent to IRA owners and to the IRS. These instructions are based on 2017 reporting requirements. Keep in mind that changes may occur after the forms are released because of newly enacted laws and IRS pronouncements. The IRS indicates that it will provide such reporting changes at the IRS website.

Traditional IRA Regular ContributionsTraditional IRA regular contributions may be made by anyone who is not turning age 70½ or older in the applicable year and who has (or whose spouse has) eligible income (generally earned income). For 2018, the contribution limit is $5,500, plus $1,000 catch-up contributions (for individuals who turn age 50 or older before the end of the tax year). The regular contribution limit is subject to IRS cost-of-living adjustments (COLAs), but the catch-up limit is not.

IRA contributions may be made during the applicable tax year or may be made as prior-year contributions if made by the IRA owner’s tax filing due date, not including extensions (April 15 for most individuals). For a contribution to be treated as a prior-year contribution, the IRA owner must make a written election.

Regular contributions (including catch-up and spousal contributions) for Traditional IRAs are reported together in Box 1, IRA contributions, on Form 5498. Note that more than one type of contribution may be reported on one Form 5498.

Traditional IRA Annual Contributions

Enter year-end fair market value.

Check if IRA owner must take an RMD in 2018.

Enter current and prior-year contributions for 2017, including regular, catch-up, and spousal contributions.

Check IRA box.

X

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Roth IRA Regular ContributionsRoth IRA regular contributions may be made by anyone who has (or whose spouse has) eligible income (generally earned income). Unlike Traditional IRAs, there is no age restriction for Roth IRA contributions. For 2018, the contribution limit is $5,500, plus $1,000 catch-up contributions (for individuals who turn age 50 or older before the end of the tax year). The regular contribution limit is subject to IRS COLAs, but the catch-up limit is not.

IRA contributions may be made during the applicable tax year or may be made as prior-year contributions if made by the IRA owner’s tax filing due date, not including extensions (April 15 for most individuals). For a contribution to be treated as a prior-year contribution, the IRA owner must make a written election.

Regular contributions (including catch-up and spousal contributions for Roth IRAs) are reported together in Box 10, Roth IRA contributions, on Form 5498. Note that more than one type of contribution may be reported on one Form 5498.

Roth IRA Annual Contributions

Traditional IRA DistributionsTraditional IRA owners may take distributions at any time. All distributions (excluding IRA-to-IRA transfers) must be reported on Form 1099-R. How the distribution is reported generally depends on whether the IRA owner had turned age 59½ at the time of distribution, and whether the financial organization has proof that the IRA owner qualifies for certain exceptions to the 10 percent early distribution penalty tax. The exceptions for the early distribution penalty tax are attainment of age 59½, death, disability, substantially equal periodic payments, health insurance if unemployed, certain medical expenses, higher education expenses, first-time homebuyer expenses, IRS levies, qualified reservist distributions, and qualified disaster-related distributions.

Enter year-end fair market value.

Enter current and prior-year Roth IRA contributions for 2017, including regular, catch-up, and spousal contributions.

Check Roth IRA box.

X

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One of the more difficult aspects of reporting IRA distributions is to determine the proper distribution codes to use in Box 7, Distribution code(s). Following are the codes used for most Traditional IRA distributions. Other codes for the other types of distributions (e.g., distributions of excess contributions, rollovers to retirement plans, conversions, and recharacterizations) are explained later.

Most Traditional IRA distributions are reported as early distributions (code 1 or 2) or normal distributions (code 7 for individuals age 59½ or older). As noted in the code descriptions, code 1 is used sometimes when an IRA owner actually qualifies for certain penalty tax exceptions, such as distributions for qualified education expenses or first-time homebuyer expenses. If code 1 is reported in Box 7 and the IRA owner believes he qualifies for a penalty tax exception, he should file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with his income tax return to claim the exception.

1 – Early distribution, no known exception

Generally applies to an IRA owner under age 59½ if none of the exceptions cited under distribution codes 2, 3, or 4 apply. Use this distribution code even when the following penalty tax exceptions apply: unreimbursed medical expenses that exceed a certain percentage of adjusted gross income*, health insurance following unemployment, certain higher education expenses, qualified acquisition costs for first-time homebuyers, or qualified reservist distributions. Also use if an IRA owner modifies a series of substantially equal periodic payments before the end of the five-year period that began with the first payment, even if the IRA owner is age 59½ or older.

2 – Early distribution, exception applies

Generally applies to a direct conversion to a Roth IRA for an IRA owner under age 59½, a distribution as a result of an IRS levy, for substantially equal periodic payments under IRC Sec. 72(t), or 2017 qualified hurricane distributions taken because of Hurricanes Harvey, Irma, and Maria. (See the Instructions for Forms 1099-R and 5498 for other exceptions.)

3 – Disability Disabled IRA owner if he has provided sufficient evidence of disability (e.g., signed physician’s statement from the Form 1040 Schedule R instructions or an equivalent statement).

4 – Death Payments to beneficiaries.

5 – Prohibited transaction

IRA owner has engaged in a prohibited transaction. For an IR account distribution used as security for a loan, use either code 1 or 7 (depending on age).

7 – Normal distribution Distribution from Traditional IRA if IRA owner is age 59½ or older.

* The Tax Cuts and Jobs Act of 2017 reduced the adjusted gross income (AGI) threshold from 10 percent to 7.5 percent for 2017 and 2018. Beginning in 2019, it will be 10 percent of AGI.

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Traditional IRA Distributions

Traditional IRA Required Minimum Distributions Financial organizations distribute required minimum distributions (RMDs) to IRA owners who are age 70½ or older before the end of the tax year. RMDs are required for Traditional IRAs, but are not required for Roth IRAs. Traditional IRA RMDs should be reported as follows.

Check Taxable amount not determined box.

Check Total distribution box if the distributions deplete the Traditional IRA.

Enter gross distribution amount.

Enter same as Box 1.

Enter federal withholding amount, if any.

Enter code 1, 2, 3, 4, 5, or 7, whichever is applicable.

Check the IRA/SEP/SIMPLE box.

Boxes 12-17: enter state and local withholding amounts, if applicable.

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Traditional IRA Required Minimum Distributions

Roth IRA DistributionsRoth IRA owners may take distributions at any time. All distributions must be reported on Form 1099-R. Three distribution codes generally are used for Roth IRA distributions: codes J, Q, and T. Other codes for the other types of distributions (i.e., distributions of excess contributions and recharacterizations) are explained later.

J – Early distribution from a Roth IRA

Applies when code Q and code T do not. But use code 2 for IRS levy or 2017 qualified hurricane distributions and code 5 for a prohibited transaction. Code J also should be used if a Roth IRA owner modified a series of substantially equal periodic payments.

Q – Qualified distribution from a Roth IRA

Applies when the IRA administrator knows that the Roth IRA owner has met the five-year waiting period for a qualified distribution, and the IRA owner is either age 59½ or older, disabled, or deceased.

T – Roth IRA distribution, exception applies

Applies when the IRA administrator does not know if the Roth IRA owner has met the five-year waiting period, but the IRA owner is either age 59½ or older, disabled, or deceased. Code T also should be used for a series of substantially equal periodic payments from a Roth IRA.

Roth IRA assets are considered distributed in the following order: regular contributions, conversions and retirement plan rollovers (by year), and earnings. Basis (e.g., contributions) from the Roth IRA generally is not taxed when distributed, but earnings are taxed if it is not a qualified distribution. And the 10 percent early distribution penalty tax also may apply. Roth IRA owners can find detailed information on how these assets are taxed in IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).

Check Taxable amount not determined box.

Check Total distribution box if the distributions deplete the Traditional IRA.

Enter gross distribution amount.

Enter Same as Box 1.

Enter federal withholding amount, if any.

Enter code 7.

Check the IRA/SEP/SIMPLE box.

Boxes 12-17: enter state and local withholding amounts, if applicable.

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Qualified Roth IRA distributions (including the earnings) always are tax- and penalty-free. A distribution is qualified if the Roth IRA owner satisfies a five-year waiting period and meets one of the following penalty tax exceptions.

• Attainment of age 59½

• Disability

• Death

• First-time homebuyer

Although first-time homebuyer expenses are considered one of the four distribution reasons that would distinguish a payment as a qualified Roth IRA distribution—provided the five-year period for qualified distributions had also elapsed—a financial organization would not know whether the first-time homebuyer exception applies. Therefore, the financial organization should not use code Q for such distributions. Taxpayers account for qualified distributions made for first-time homebuyer purposes by filing Form 8606, Nondeductible IRAs, with their federal tax returns.

Roth IRA owners sometimes qualify for a penalty tax exception when the Form 1099-R shows code J (e.g., for unreimbursed medical expenses or qualified higher education expenses). Roth IRA owners must file Form 5329 with their income tax returns to claim the penalty tax exceptions.

Financial organizations report most Roth IRA distributions (other than distributions of excess contributions and recharacterizations) as follows.

Roth IRA Distributions

Check Taxable amount not determined box.

Check Total distribution box if the distributions deplete the Roth IRA.

Enter gross distribution amount.

Leave blank.

Enter federal withholding amount, if any.

Enter code J, Q, or T, whichever is applicable.

Do not check the IRA/SEP/SIMPLE box.

Boxes 12-17 enter: state and local withholding amounts, if applicable

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Disaster-Related DistributionsThe following types of disaster-related distributions from IRAs and eligible employer-sponsored retirement plans are not subject to the 10 percent early distribution penalty tax.

Qualified Hurricane DistributionsThe Disaster Tax Relief and Airport and Airway Extension Act of 2017 allows certain individuals to take up to $100,000 in aggregate from their IRAs and eligible retirement plans that will be considered exempt from the 10 percent early distribution penalty tax. Individuals whose principal residence is within a presidentially declared disaster area affected by Hurricane Harvey, Irma, or Maria in 2017 and who have sustained an economic loss as a result, may request “qualified hurricane distributions.” Qualified hurricane distributions are distributions taken during a specific time period, generally after August 22, 2017, and before January 1, 2019 (depending on which hurricane an individual was affected by).

Financial organizations were to report 2017 qualified hurricane distributions on Form 1099-R using code 2, Early distribution, exception applies, in Box 7.

Qualified 2016 Disaster Distributions The Tax Cuts and Jobs Act of 2017 provides similar relief from the early distribution penalty tax for “qualified 2016 disaster distributions.” These are distributions taken on or after January 1, 2016, and before January 1, 2018, by victims of any 2016 presidentially declared disaster event.

As of this writing, the IRS had not provided information on how financial organizations should report this penalty tax exception.

Qualified Wildfire DistributionsThe Bipartisan Budget Act of 2018 allows individuals whose principal residence is within the declared disaster area and who have suffered an economic loss as a result of the California wildfires to distribute up to $100,000 in aggregate from their IRAs or eligible retirement plans that will be considered exempt from the 10 percent early distribution penalty tax. This applies to distributions taken on or after October 8, 2017, and before January 1, 2019.

As of this writing, the IRS had not provided information on how financial organizations should report this penalty tax exception.

Beneficiary DistributionsWhen an IRA distribution is made to the beneficiary of a deceased IRA owner, the financial organization must report the distribution to the IRS and to the beneficiary on Form 1099-R. The distribution is always reported in the beneficiary’s name and the Social Security number (or tax identification number). For Traditional IRAs, code 4, Death, generally is entered in Box 7. For Roth IRAs, as described in the code descriptions earlier, code Q or code T is entered in Box 7 for beneficiary distributions. Code Q is entered if the beneficiary distribution is qualified: the deceased IRA owner met the five-year waiting period and has died. Otherwise, code T is entered in Box 7.

A separate Form 1099-R is generated to report each individual beneficiary’s distribution in the case of multiple beneficiaries of the same IRA. Financial organizations paying out to multiple beneficiaries of the same IRA should not enter anything in Box 9a, Your percentage of total distribution. Box 9a is not used for IRA distributions.

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An IRA beneficiary may be a trust or an estate. Checks issued to a trust or estate should be written to the name of the trust or estate (e.g., “Estate of John Smith”). The titling may also include the representative of the entity as in, “John Smith Living Trust; Ellen Jones, Trustee.” The check generally is not made payable directly to the individual representing the entity (e.g., the personal representative or administrator of the estate).

When an estate or trust receives an IRA distribution, Form 1099-R is issued in the name of the trust or estate with the trust’s or estate’s tax identification number.

Traditional IRA Beneficiary Distributions

Check Taxable amount not determined box.

Check Total distribution box if the distributions deplete the Traditional IRA.

Enter gross distribution amount.

Enter same as Box 1.

Enter Federal withholding amount, if any

Enter code 4.

Check the IRA/SEP/SIMPLE box.

Boxes 12-17: enter state and local withholding amounts, if applicable

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Roth IRA Beneficiary Distributions

Qualified HSA Funding DistributionsHSA owners have a one-time option to take “qualified HSA funding distributions” from Traditional or Roth IRAs and directly move them to an HSA. The qualified HSA funding distribution amount is limited to the annual HSA contribution limit, and such amount offsets any regular annual contributions to the HSA for the applicable year. The transaction must be performed directly: the IRA owner may not take receipt of the assets. Assets may be transferred internally to the HSA, or a check can be made payable to the receiving financial organization. When the assets leave the Traditional or Roth IRA, they are reported as distributions to the IRA owner, generally with code 1 or 7 for Traditional IRAs, or code J, Q, or T for Roth IRAs. (See “Traditional IRA Distributions” and “Roth IRA Distributions” earlier.)

IRA-to-IRA Transfers and Rollovers

Often, individuals want to move IRA assets from one IRA of the same type to another by means of a transfer or a rollover. This may occur within the same financial organization or the assets may move from an IRA at one financial organization to an IRA at a different organization.

TransfersAn IRA-to-IRA transfer is a way of moving money or property tax free from one IRA to another. The IRA owner does not receive the money or property in a transfer. Rather, the assets are moved electronically, or a check is made payable to the receiving financial organization (e.g., “Heavenly Harvest Bank, Custodian, for the benefit of Harry Hart’s IRA”). If stock or property is being transferred in-kind (stocks, real estate, etc., rather than cash), it must be reregistered in the name of the new trustee or custodian.

Check Taxable amount not determined box.

Check Total distribution box if the distributions deplete the Roth IRA.

Enter gross distribution amount.

Leave blank.

Enter federal withholding amount, if any.

Enter code Q or T, whichever is applicable.

Do not check the IRA/SEP/SIMPLE box.

Boxes 12-17: enter state and local withholding amounts, if applicable.

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Transfers are not reported to the IRS. The financial organization doing the distribution does not generate a Form 1099-R showing a distribution. Likewise, the organization receiving the assets does not show the transfer deposit on Form 5498 as a contribution. The transfer will be reflected as part of the IRA’s fair market value and reported in Box 5 of Form 5498.

Federal income tax withholding requirements generally apply to all IRA distributions. Federal income tax withholding requirements do not apply to IRA-to-IRA transfers because the transaction is not considered a distribution from the IRA.

IRA owners may do an unlimited number of transfers per year. Also, an IRA owner may request a transfer of all or just a portion of the IRA. Transfers may be subject to loss-of-earnings penalties if there is an early withdrawal of an investment.

RolloversA rollover generally is a tax-free, reportable movement of cash or other assets from one retirement savings vehicle (IRA or retirement plan account) to another. Unlike transfers, IRA owners receive the money or property from an IRA before rolling it over to an IRA or employer-sponsored retirement plan.

An IRA-to-IRA rollover occurs after an IRA owner has taken an IRA distribution—usually by requesting a distribution (e.g., completing a withdrawal form) and receiving the cash or a check in his own name. To successfully complete the rollover, he generally must follow through with a rollover contribution to the same type of IRA (or retirement plan account) within 60 days. The Consolidated Appropriations Act of 2016 allows Traditional IRA assets to be rolled over to SIMPLE IRAs after the IRA owner satisfies a two-year SIMPLE IRA waiting period (two years from when the first contribution by the employer is deposited to the SIMPLE IRA).

IRA owners must make an irrevocable election to treat the contribution as a rollover contribution. This election can be made by completing and signing an IRA contribution eligibility form. While the statute does not specifically state that direct transfers can be made from Traditional IRAs to SIMPLE IRAs, the IRS has stated in various documents and an IRS official confirmed to Ascensus that these also are allowed after the SIMPLE IRA two-year waiting period.

60-Day Rollover RuleAn individual has 60 days to complete an IRA rollover or an indirect rollover from a retirement plan. Day one of the 60-day time period begins the day after the individual receives the distribution. The following circumstances, however, may allow for a waiver or extension of the 60-day period.

• The individual may qualify for an automatic waiver because of financial organization error as defined in Revenue Procedure (Rev. Proc.) 2003-16, which would extend the 60-day period to one year.

• The individual may provide a written self-certification that he qualifies for a waiver under rules described in Rev. Proc. 2016-47.

• The individual may apply for an IRS private letter ruling (PLR) for a fee of $10,000 asking for a waiver of the 60-day limitation under the rules described in Rev. Proc. 2018-4.

• An IRS representative may grant a waiver of the 60-day period during an examination of the individual’s income tax return (IRC Sec. 408(d)(3)(l)).

96 • IRA Reporting

• If an IRA distribution that fails to meet the qualified first-time homebuyer expenses solely because of a delay or cancellation of the purchase or construction of the residence qualifies for a the 60-day period is extended to 120 days (IRC Sec. 72(t)(8)(E)).

• Eligible individuals who take qualified hurricane distributions as provided by the Disaster Tax Relief and Airport and Airway Extension Act of 2017, take qualified wildfire distributions as allowed by the Bipartisan Budget Act of 2018, or take certain qualified 2016 disaster distributions provided by the Tax Cuts and Jobs Act of 2017 (TCJA), have three years to repay (i.e., roll over) the distribution.

• Plan participants generally have 60 days to roll over a plan loan offset. The TCJA extends this time limit to the individual’s tax filing deadline, including extensions, for the tax year in which the offset occurs. The extension applies only to offsets resulting from a plan termination or severance from employment and is effective for offsets distributed in tax years beginning after 2017.

IRA Owner Self-Certification of Late RolloverIn August 2016, the IRS issued Rev. Proc. 2016-47 describing an option for individuals to self-certify that they qualify for relief from the 60-day rollover rule. This certification generally may be relied upon by financial organizations offering IRAs (and by plan administrators). In a statement posted on its website a few days later, the IRS clarified that this self-certification is only for the purpose of accepting rollovers that do not satisfy the 60-day rule, not for rollovers that do not satisfy other rollover requirements.

For individuals to qualify for relief through self-certification, the IRS must not have previously denied a waiver request related to the rollover contribution. In addition, the rollover contribution must satisfy all requirements of a valid rollover (except for the 60-day rule). Lastly, the individual must have missed the 60-day deadline because one or more of the following reasons prevented him from completing the rollover.

• An error was committed by the financial organization receiving the contribution or making the distribution to which the contribution relates.

• The distribution check was misplaced and never cashed.

• The individual deposited and kept the distribution in an account that she mistakenly thought was an eligible plan.

• The individual’s principal residence was severely damaged.

• A member of the individual’s family died.

• The individual or her family member was seriously ill.

• The individual was incarcerated.

• Restrictions were imposed by a foreign country.

• A postal error occurred.

• The distribution was made because of an IRS levy and the levy proceeds were returned to the individual.

• The distributing plan delayed providing the information required to complete the rollover despite the individual’s reasonable efforts to obtain the information.

The rollover contribution must be made to the IRA as soon as practicable after the qualified reason(s) no longer prevents the individual from making the rollover contribution. This requirement is deemed to be satisfied if the contribution is made within 30 days after the reason(s) no longer applies.

IRA Reporting • 97

An individual may make this self-certification in writing by completing and signing the model self-certification letter in Rev. Proc. 2016-47, or a substantially similar letter or form provided by the financial organization. For the purposes of determining whether an individual satisfies the conditions for a waiver, the financial organization receiving the rollover may rely on the individual’s self-certification, unless it has knowledge of the contrary. A copy of the certification document should be kept in the individual’s file and be available if requested during a tax examination.

Self-certification is not a waiver by the IRS; it allows an individual to report the contribution as a valid rollover unless later informed otherwise by the IRS. If the IRS later determines upon examination that the self-certification requirements were not met, the individual may be subject to additional taxes and penalties. The IRS also has the authority during a tax examination to waive the 60-day limitation even if an individual has not self-certified his eligibility for a waiver.

Beginning with 2017 Forms 5498, these late rollovers are reported in Boxes 13a, Postponed Contributions, and 13c, Code. The financial organization must include the late rollover contribution amount in Box 13a, and “SC” in Box 13c. Such rollovers that were contributed to IRAs in 2016 were to be reported in Box 2, Rollover contributions.

One Rollover Per 12 MonthsAn IRA owner is allowed one IRA-to-IRA rollover per one-year period (IRC Sec. 408(d)(3)(B)). In March 2014, the IRS changed its interpretation of this requirement to follow a U.S. tax court ruling in Bobrow v. Commissioner. The court ruled that a taxpayer is limited to one IRA-to-IRA rollover per 12-month period, regardless of the number of IRAs he has.

Effective January 1, 2015, IRA owners may complete only one IRA rollover in any 12-month period, regardless of how many IRAs they own. The 12-month period begins on the day the IRA owner receives the distribution.

The 12-month limitation does not affect an IRA owner’s option to transfer assets from one IRA directly to another of the same type and does not apply to rollovers between retirement plans and IRAs. The 12-month rule also does not apply to certain rollovers related to first-time home purchase failures (IRC Sec. 72(t)(8)(E)) and qualified disaster distributions.

IRS Announcement 2014-32 and News Release IR-2014-107 provided additional guidance on the one-per-12-month rollover limitation that applies to IRAs.

• Traditional and Roth IRAs are aggregated for purposes of the one-per-taxpayer limitation. A distribution and subsequent rollover from either type of IRA disqualifies the taxpayer from completing a subsequent rollover for 12 months from the distribution date of the amount previously rolled over.

• “Traditional” IRA is interpreted as including simplified employee pension (SEP) plan assets and SIMPLE IRAs. Therefore, any IRA rollover from a Traditional, Roth, “SEP IRA,” or SIMPLE IRA will restrict the taxpayer for subsequent IRA rollovers for 12 months.

• Roth IRA conversions and direct rollovers to and from non-IRA-based employer-sponsored retirement plans are not counted when applying the new rollover limitation.

Distributions made to IRA owners because of financial organization failures can be rolled over to IRAs within 60 days. An IRS Associate Chief Counsel stated in a letter to the Federal Deposit Insurance Corporation (FDIC), dated May 31, 2017, that IRA distributions made from failed financial organizations are disregarded for purposes of applying the one-per-12-month rollover limitation.

98 • IRA Reporting

Traditional-to-Traditional IRA RolloverA financial organization reports an IRA distribution that a Traditional IRA owner intends to roll over simply as a distribution to the IRA owner, generally by entering code 1 or 7 in Box 7 of Form 1099-R. (See “Traditional IRA Distributions” earlier.) Once the assets are distributed, the IRA owner generally has 60 days to roll over the assets (or a portion of the assets) to a Traditional IRA. (See “60-Day Rollover Rule” earlier.)

Upon completing the rollover, the financial organization that receives the assets reports the rollover contribution in Box 2, Rollover contributions, on Form 5498. Financial organizations must report self-certified late rollover amounts received in 2017 and later on Form 5498 in Box 13a, Postponed contribution, with code “SC” in Box 13c, Code. Note that more than one type of contribution may be reported on one Form 5498.

Traditional IRA Rollover Contribution

Roth-to-Roth IRA RolloverA financial organization reports a Roth IRA distribution that a Roth IRA owner intends to roll over simply as a distribution to the Roth IRA owner, generally by entering whichever code applies for a distribution to the Roth IRA owner (i.e., code J, Q, or T) in Box 7 of Form 1099-R. (See “Roth IRA Distributions” earlier.) Once the assets are distributed, the IRA owner generally has 60 days to roll over the assets (or a portion of the assets) back to a Roth IRA. (See “60-Day Rollover Rule” earlier.)

Upon completing the rollover, the financial organization that receives the assets reports the rollover contribution in Box 2 on Form 5498. Financial organizations must report self-certified late rollover amounts received in 2017 and later on Form 5498 in Box 13a, Postponed contribution, with code “SC” in Box 13c, Code. Note that more than one type of contribution may be reported on one Form 5498.

Enter year-end fair market value.

Check if IRA owner must take an RMD in 2018.

Enter total amount of rollover contributions.

Check IRA box.

Enter self-certified late rollover amount.

Enter “SC” for self-certified late rollovers.

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Roth IRA Rollover Contribution

Retirement Plan Rollovers

Recent laws have increased retirement savings portability between IRAs and employer-sponsored retirement plans. Most recently, the Consolidated Appropriations Act of 2016 (P.L. 114-113) allowed for rollovers of non-Roth assets to SIMPLE IRAs from a Traditional IRA or eligible retirement plan after December 18, 2015. But such assets cannot be rolled over before the SIMPLE IRA owner satisfies a two-year waiting period. The two-year waiting period starts on the date that the first contribution under the employer’s SIMPLE IRA plan is made to the employee’s SIMPLE IRA.

Retirement plan participants and beneficiaries may roll over their retirement plan assets to Traditional and Roth IRAs. Traditional IRA owners (and SIMPLE IRA owners who meet the two-year waiting period) may roll over IRA assets to employer-sponsored retirement plans. But, they may not roll over any Traditional IRA basis (e.g., nondeductible contributions) to a retirement plan, and may not roll over Roth IRA assets to a retirement plan. IRA beneficiaries may not roll over their inherited IRA assets to retirement plans unless they are a spouse beneficiary treating the IRA assets as their own.

Rollovers by plan participants may be done directly through electronic transfer or with checks made payable to the receiving organization, or indirectly with the IRA owner or plan participant taking receipt of the assets (e.g., a check made payable to the individual). Indirect rollovers generally must be completed within 60 days after the individual receives the assets. If eligible under the requirements of Revenue Procedure 2016-47, individuals may self-certify that they qualify for a late (post-60 day) rollover of retirement plan assets to an IRA or to another retirement plan account. IRA owners must make irrevocable elections (e.g., by completing and signing a rollover request or contribution eligibility form) to treat contributions as rollover contributions.

Enter year-end fair market value.

Enter total amount of rollover contributions.

Check Roth IRA box.

Enter self-certified late rollover amount.

Enter “SC” for self-certified late rollovers.

100 • IRA Reporting

Reporting Retirement Plan Rollovers to IRAsReporting distributions from the retirement plan is the employer’s responsibility as payer of the assets. An eligible rollover distribution that is rolled over to a Traditional or Roth IRA is reported by the employer on Form 1099-R.

Eligible rollover distributions that are directly or indirectly rolled over to IRAs are reported by financial organizations receiving the rollover contributions to the IRAs in Box 2 on Form 5498. For 2017 and later reporting, IRA owner self-certified late (post-60 day) rollovers are reported in Box 13a, Postponed contribution, with code “SC” in Box 13c, Code.

Traditional or Roth IRA Rollover Contributions

Beneficiary Rollovers to IRAsSpouse beneficiaries can roll over retirement plan assets to their own IRAs or to “inherited” IRAs and may do so through direct or indirect rollovers. Indirect rollovers must be completed within 60 days, and spouse beneficiaries may self-certify a late (post-60 day) rollover, if eligible. A nonspouse beneficiary of an employer-sponsored retirement plan may directly roll over plan assets to an inherited IRA. (See “Inherited IRA Plan Documents” in Chapter 2, Opening an IRA.) Financial organizations that receive the rollover assets report them on Form 5498.

Enter year-end fair market value.

Check if Traditional IRA owner must take an RMD in 2018.

Enter total amount of rollover contributions.

Check IRA for a Traditional IRA, or Roth IRA for a Roth IRA.

Enter self-certified late rollover amount.

Enter “SC” for self-certified late rollovers.

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Beneficiary Rollovers to IRAs

Traditional IRA Rollovers to Retirement PlansIRA owners may roll over their pretax Traditional IRA assets to employer-sponsored retirement plans. Nonspouse beneficiaries may not roll over IRA assets to retirement plans, and Roth IRA assets may not be rolled over to retirement plans.

If the Traditional IRA owner takes an IRA distribution with the intent of indirectly rolling it over to a retirement plan within 60 days of receipt, the financial organization simply reports it on Form 1099-R as a distribution to the individual. (See “Traditional IRA Distributions” earlier.) If the IRA owner elects a direct rollover to a retirement plan in which the assets are paid directly to the plan, the financial organization reports it on Form 1099-R with code G, Direct rollover and direct payment, in Box 7. Note that income tax withholding does not apply to direct rollovers.

G – Direct rollover and direct payment

Applies to a Traditional IRA distribution that is directly rolled over to an employer-sponsored retirement plan. (Retirement plan distributions directly rolled over to IRAs also are reported with code G.)

Enter year-end fair market value.

Check this box only if a spouse beneficiary turning age 70½ or older in 2018 rolls over inherited assets to his own Traditional IRA.

Check IRA for a Traditional or Roth IRA for a Roth IRA.

Enter self-certified late rollover amount.

Enter “SC” for self-certified late rollovers.

Enter total amount of rollover contributions.

102 • IRA Reporting

Traditional IRA Direct Rollovers to Retirement Plans

Designated Roth Account Rollovers to Roth IRAsCertain eligible retirement plans (IRC Sec. 401(k), 403(b), governmental 457(b), and the federal government’s Thrift Savings Plan) may include designated Roth programs in which plan participants may make salary deferrals that are treated as after-tax Roth contributions. Retirement plan designated Roth account assets may be rolled over directly or indirectly to Roth IRAs, but they may not be rolled over to Traditional IRAs. The employer will report the distribution on Form 1099-R.

Financial organizations that receive rollover contributions report them on Form 5498 in Box 2. For 2017 and later reporting, IRA owner self-certified late (post-60 day) rollovers are reported in Box 13a, Postponed contribution, with code “SC” in Box 13c, Code.

Do not check Taxable amount not determined box.

Check Total distribution box if the distributions deplete the Traditional IRA.

Enter total amount rolled over to retirement plan.

Enter 0 (zero).

Enter code G.

Check the IRA/SEP/SIMPLE box.

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Retirement Plan Roth Account Rollovers to Roth IRAs

Recharacterizations

If an individual makes a contribution to a Roth IRA or to a Traditional IRA, she may treat the contribution as having been made to the other type of IRA (Traditional or Roth). She must move the assets with the net income attributable (NIA) to the other type of IRA (Treas. Reg. 1.408A-5, Q&A 6). This transaction is termed a “recharacterization.”

NOTE: The Tax Cuts and Jobs Act of 2017, enacted late in 2017, eliminated recharacterizations of conversions and retirement plan-to-Roth IRA rollovers, effective for taxable years beginning on or after January 1, 2018. Distributions of Traditional IRA or retirement plan assets before January 1, 2018, that are converted or rolled over to a Roth IRA generally can be recharacterized to a Traditional IRA.

Recharacterizations may only be done directly—through electronic transfer or with a check made payable to the receiving organization; an IRA owner may not recharacterize IRA assets indirectly. To do a recharacterization, the IRS requires the IRA owner to make an irrevocable election. This often is done on a recharacterization form. IRA owners have until their tax return due date, plus extensions (October 15 for most individuals), to complete recharacterizations.

The IRS provides a specific formula for calculating NIA for recharacterizations and for withdrawals of excess contributions. See “Excess Contributions” later in this chapter for how to calculate NIA.

Enter year-end fair market value.

Enter total amount of rollover contributions.

Check Roth IRA box.

Enter self-certified late rollover amount.

Enter “SC” for self-certified late rollovers.

104 • IRA Reporting

Although the IRS consistently refers to a recharacterization as a trustee-to-trustee transfer, Notice 98-49 states that a recharacterization is a reportable event, which is not consistent with procedures for standard transfers. The financial organization of the distributing IRA, therefore, should generate distribution reporting on Form 1099-R. The financial organization of the receiving IRA should report the recharacterization as a contribution on Form 5498. Note that taxpayers are required to attach an explanation to their federal income tax returns detailing their recharacterizations to the IRS.

Form 1099-R Recharacterization ReportingFinancial organizations must separately report “prior-year” recharacterizations from “same-year” recharacterizations using certain codes in Box 7 of Form 1099-R. A prior-year recharacterization is one that occurs after the year for which the contribution being recharacterized was made. A same-year recharacterization occurs when the contribution that is subsequently recharacterized and the recharacterization take place in the same year. The code definitions follow.

Recharacterization Codes

N – Recharacterized IRA contribution made for current year

Use code N for a recharacterization of an IRA contribution made for and recharacterized in the current year.

R – Recharacterized IRA contribution made for prior year

Use code R for an IRA contribution made for the prior year and recharacterized in the current year.

Financial organizations must combine all prior-year recharacterizations from the same IRA and report them in aggregate for that IRA on one Form 1099-R, using code R. A similar procedure applies for same-year recharacterizations from the same IRA, but code N applies.

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Traditional and Roth IRA Recharacterization: Form 1099-R

Form 5498 Recharacterization ReportingFinancial organizations receiving recharacterized contributions report them in Box 4, Recharacterized contributions, on Forms 5498. Financial organizations must report all recharacterized contributions received by the same IRA in a single year on one Form 5498.

IRA administrators are permitted, but not required, to report an IRA’s fair market value and any other contributions made to the IRA for the year on the same Form 5498 used to report a recharacterization. Alternatively, IRA administrators may report each contribution type on a separate Form 5498.

Do not check Taxable amount not determined box.

Check Total distribution box if the distributions deplete the IRA.

Enter total recharacterized contribution and NIA.

Enter 0 (zero).

Enter code N or R, whichever applies.

Do not check the IRA/SEP/SIMPLE box.

106 • IRA Reporting

Traditional and Roth IRA Recharacterization: Form 5498

Conversions

A conversion is a taxable movement of cash or other assets from a Traditional IRA (or a SIMPLE IRA after two years of participation) to a Roth IRA. When converting assets to a Roth IRA, the IRA owner must pay tax on all previously untaxed assets included in the conversion. Although the assets are taxed, they are not subject to the 10 percent early distribution penalty tax. IRA owners may convert their IRA assets to Roth IRAs either directly or indirectly. IRA owners must complete indirect conversions within 60 days of receipt of the assets.

Conversions of Traditional IRA distributions that were taken before January 1, 2018, generally can be recharacterized back to a Traditional IRA. The Tax Cuts and Jobs Act of 2017, enacted in December 2017, eliminated recharacterizations of conversions that take place for taxable years after December 31, 2017. This, in effect, eliminates reconversions —conversions of amounts previously converted then recharacterized.

Conversion ReportingThe codes used for reporting conversions on Form 1099-R follow. A direct conversion (electronic transfer or check made payable to the receiving financial organization) for an individual under age 59½ is reported in Box 7 of Form 1099-R with code 2, and an indirect conversion for an individual under age 59½ is reported with code 1. Code 7 is used for IRA owners age 59½ or older.

Enter year-end fair market value.

Enter total recharacterized contributions.

Check IRA box for a Traditional IRA or Roth IRA box for a Roth IRA.

Check if Traditional IRA owner must take an RMD in 2018.

IRA Reporting • 107

1 – Early distribution, no known exception

Indirect conversion made by individual under age 591⁄2.

2 – Early distribution, exception applies

Direct conversion made by individual under age 591⁄2.

7 – Normal distribution Direct or indirect conversion made by individual age 591⁄2 or older.

If IRA owners under age 59½ elect withholding for direct conversions, two Forms 1099-R are issued. One reports the amount that is actually converted to the Roth IRA with code 2. The amount of withholding is not contributed to the Roth IRA, but rather is sent to the IRS as a prepayment of federal income tax. The withholding amount is considered a distribution to the IRA owner. It is reported separately on another Form 1099-R generally with code 1 in Box 7, and is considered taxable income and subject to the 10 percent early distribution penalty tax (unless a penalty tax exceptions applies).

For individuals age 59½ or older, whether done directly or indirectly, all amounts (including the withholding), are reported with code 7, so they may be reported on the same Form 1099-R.

IRA Conversion Form 1099-R (no withholding)

Check Taxable amount not determined box.Check Total distribution box if the distributions deplete the Traditional IRA.

Enter total amount converted to Roth IRA.

Enter same amount as in Box 1.

Enter code 1, 2, or 7, whichever is applicable.Check the IRA/SEP/SIMPLE box.

108 • IRA Reporting

Direct IRA Conversion, Under Age 59½, Withholding Applied

Form 2, Withheld Amount (considered distributed to the IRA owner)

Check Taxable amount not determined box.Check Total distribution box if the distributions deplete the Traditional IRA.

Enter total amount of withholding.

Enter same amount as in Box 1.

Total amount of federal withholding

Enter code 1.Check the IRA/SEP/SIMPLE box.

Boxes 12-17: enter amounts of state and local withholding, if applicable.

Form 1, Converted Amount

Check Taxable amount not determined box.Check Total distribution box if the distributions deplete the Traditional IRA.

Enter total amount converted to Roth IRA.

Enter same amount as in Box 1.

Enter code 2.Check the IRA/SEP/SIMPLE box.

IRA Reporting • 109

Financial organizations report all conversion contributions on Form 5498 in Box 3, Roth IRA conversion amount. Note that while the conversion tax rules generally apply to employer-sponsored retirement plan-to-Roth IRA rollovers, these rollovers are reported in Box 2, Rollover contributions, on Form 5498.

IRA Conversion Form 5498

Excess Contributions

Although IRA owners generally are responsible for providing all the informa tion necessary to report a distribution, IRA administrators often are called upon to help determine the distribution amount that an IRA owner must take to correct an excess contribution and the taxable portion of the amount withdrawn.

NOTE: The following procedures apply to excess Traditional and Roth IRA contributions.

General RulesTraditional and Roth IRA contributions, in aggregate, are limited to the lesser of the annual contribution limit ($5,500 for 2017 and for 2018, plus $1,000 catch-up contributions annually if age 50 or older) or 100 percent of earned income (IRC Sec. 219(b)).

If an IRA owner contributes more than he is eligible to contribute to a Traditional or Roth IRA, the IRA owner has an excess contribution and may be subject to a six percent penalty tax each year the excess remains in the IRA (IRC. Sec. 4973(b)). Whether the penalty tax applies to the excess contribution depends on how the excess contribution is handled and when the excess contribution is corrected and removed.

Enter year-end fair market value.

Enter total conversion amount.

Check Roth IRA box.

110 • IRA Reporting

To avoid the six percent penalty tax, an IRA owner must remove the excess along with the net income attributable (NIA) by her tax return deadline (plus extensions). The instructions for Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, indicate that if an IRA owner timely files her tax return by the tax return due date (plus extensions), she may withdraw the excess with NIA up to six months after the due date of her tax return (generally, October 15), and thus, avoid penalties. Excess contributions may be removed after this deadline, but IRA owners will have to pay the six percent penalty tax for each year an excess remains an excess in the IRA on December 31.

IRA owners who make IRA contributions that are not excess contributions may remove their contributions following the procedures described above. IRA owners must remove these amounts by their tax return deadlines (plus extensions). Financial organizations report these distributions the same way they report the removal of excess contributions with NIA.

Net Income AttributableIf an IRA owner chooses to correct the excess by distributing the excess before the tax return deadline plus any extensions, he must remove the excess and the NIA to the excess. Determining NIA is done according to an IRS formula released in Treasury Decision (TD) 9056 (Treas. Reg. 1.408-11). The formula also is used to calculate NIA for IRA contributions and conversions that are recharacterized. (See “Recharacterizations” earlier.)

While the IRS does not require financial organizations to calculate the NIA, most organizations do assist IRA owners with these calculations as a customer service. Financial organizations that do not provide this service should be prepared to provide IRA owners with the appropriate balances that must be used for the NIA calculation. Forms providers, like Ascensus, may provide NIA worksheets or electronic products to help with these calculations.

Calculating the NIAThe NIA to an excess contribution (or recharacterization) generally is determined by allocating to the contribution a pro rata portion of the net income (or loss) on the IRA assets during the period the IRA held the contribution. A negative NIA is permitted under this method for both excess contributions and recharacterizations. The NIA generally is calculated by multiplying the excess contribution by the total earnings, and dividing the result by the adjusted opening balance. As defined in Treas. Reg. 1.408-11, the NIA formula is as follows.

excess contribution x (adjusted closing balance – adjusted opening balance)NIA = ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– adjusted opening balance

Adjusted closing balance (ACB) is the IRA’s fair market value at the end of the computation period plus any distributions (including rollovers, transfers, and recharacterizations) made from the IRA during the computation period, minus any applicable loss of earnings penalty (e.g., investment penalty or fees).

Adjusted opening balance (AOB) is the IRA’s fair market value at the beginning of the computation period plus any contributions (including rollovers, transfers, recharacterizations, and the excess contribution that is being removed) made to the IRA during the computation period.

Computation period is the period immediately before the time the excess contribution is made, through the date of distribution.

IRA Reporting • 111

EXAMPLE: On August 5, 2018, Emma, age 30, deposited $5,500 in to her Traditional IRA at First Bedrock Bank. On that day, the balance of her IRA before the contribution was $10,500. Later in the year, Emma realized that she was ineligible to make that contribution because she already made a $5,500 contribution earlier in 2018 to another IRA. On September 28, 2018, Emma decided to remove the excess contribution. She must withdraw the $5,500 excess contribution plus the NIA. On September 28, 2018, her IRA balance was $16,500.

STEP 1: Applying the NIA formula, the financial organization determined the NIA to be $171.88. The amount is determined as shown below.

Excess contribution: $5,500

ACB-AOB: ($16,500 + $0) – ($10,500 + $5,500) = $500

AOB: ($10,500 + $5,500) = $16,000

$5,500 x $500 NIA: ––––––––––––– = $171.88 $16,000

STEP 2: Emma completed a withdrawal statement and was offered the proper withholding notice and election. Emma signed the form and waived withholding. The IRA administrator issued Emma a check for $5,671.88 and informed her that the $171.88 of interest income was taxable in 2018, the year she made the contribution.

STEP 3: The IRA administrator reports the distribution on a 2018 Form 1099-R.

Clarifications to NIA MethodIn addition to considering transfers, rollovers, and recharacterizations in the NIA formula, the regulations make other clarifications.

• If an IRA is not valued on a daily basis, the fair market value at the beginning of the computation period is deemed to be the most recent, regularly determined, fair market value of the asset.

• If an individual owns more than one IRA, the NIA calculation is performed on the IRA containing the excess contribution being returned, and the distribution must be made from that IRA.

• If an IRA has received more than one regular contribution for a particular tax year, the last regular contribution (not transfer or rollover) made to the IRA is deemed to be the contribution that was distributed, and a single computation period applies.

• For the recharacterization of a contribution where multiple contributions have been made, the IRA owner can choose (by date and by dollar amount, but not by specific assets) which contribution or portion thereof is to be recharacterized. If recharacterizing multiple contributions that were consecutive contributions in a series, only one NIA calculation is required using a computation period based on the first contribution in the series. If recharacterizing more than one contribution that is not part of a consecutive series, separate NIA calculations must be made on each.

• NIA is based on the IRA’s overall dollar value, not on the return of specific assets.

112 • IRA Reporting

Excess Contribution Removed Before Tax Filing DeadlineThe distribution codes used to report the removal of an excess contribution in Box 7 of the Form 1099-R will depend upon when the excess is corrected. The codes indicate to the IRS that the earnings are taxable in the year that the contribution actually was deposited into the IRA. The excess codes used to report the removal of excesses before the deadline follow.

Excess Contribution Codes

8 – Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in current year

Excess contributions, plus earnings, if the excess contributions were deposited and returned in the current year (regardless of the year to which the excess contribution was attributed).

P – Excess contributions plus earnings/excess deferrals taxable in prior year

Excess contributions, plus earnings, if the excess contributions were actually deposited in the prior year for the prior year and returned in the current year.

In some situations, the IRS requires that two codes be reported in Box 7. For Traditional IRAs, if the excess contribution is removed before the tax return due date plus extensions, the distribution reason codes on Form 1099-R will be either 8 or P (depending on the year of contribution and removal) with code 1, Early distribution no known exception (if the IRA owner is under age 59½), or 4, Death (if the IRA owner is deceased). For Roth IRAs, the distribution reason codes will be either 8 or P (depending on the year of contribution and removal) with code J. For both Traditional and Roth IRAs, the gross distribution (excess and NIA) appears in Box 1 of Form 1099-R and only the NIA is reported in Box 2a, Taxable amount.

IRA Reporting • 113

Traditional IRA Excess Distribution With NIA (in 2017)

Roth IRA Excess Distribution With NIA (in 2017)

Do not check Taxable amount not determined box.Check Total distribution box if the distributions deplete the IRA.

Enter total amount of distributed excess contributions plus NIA.

Enter NIA amount.

Enter federal withholding amount, if applicable.

Code P if contribution was deposited in 2016, or code 8 if deposited in 2017. Also enter code 1 if under age 591⁄2 or code 4 if paid to a beneficiary. (Enter only code 8 or P for IRA owners age 591⁄2 or older.)Check the IRA/SEP/SIMPLE box.

Boxes 12-17 enter: state and local withholding amounts, if applicable.

Do not check Taxable amount not determined box.Check Total distribution box if the distributions deplete the IRA.

Enter total amount of distributed excess contributions plus NIA.

Enter NIA amount.

Enter federal withholding amount, if applicable.

Code P if contribution was deposited in 2016, or code 8 if deposited in 2017. Also enter code J.Do not check the IRA/SEP/SIMPLE box.

Boxes 12-17: enter state and local withholding amounts, if applicable.

114 • IRA Reporting

Excess Contributions Removed After Tax Filing DeadlineIRA owners who make excess contributions also have the option of leaving the excess contribution in the Traditional or Roth IRA and carrying it forward as a contribution for the next year. They also may remove the excess contribution after the deadline (generally October 15). But if after the deadline, the NIA is not distributed as part of the excess. With both of these options, the six percent penalty tax must be paid by the IRA owner for any year the excess remains an excess in the IRA on December 31.

Excess contributions removed after the deadline are reported similar to any other distribution to the individual, generally with code 1 or 7 for Traditional IRAs, and codes J, Q, or T for Roth IRAs. But for both Traditional and Roth IRA excesses removed after the deadline, Box 2a is left blank.

Traditional and Roth IRA Excess Distribution After Tax Return Deadline, Plus Extensions

Excess Contribution Ordering RulesTreas. Reg. 1.408A-3, Q&A 3, Example 2, implies that contribution ordering rules exist when an individual creates an excess contribution, involving both Traditional and Roth IRA contributions for a year. The example states that an individual’s contributions are applied first to the Traditional IRA and then to the Roth IRA. An IRS representative confirmed to Ascensus that contributions are deemed made to the Traditional IRA first, then to the Roth IRA.

Check Taxable amount not determined box.Check Total distribution box if the distributions deplete the IRA.

Enter Total amount of distributed excess.

Leave blank.

Enter federal withholding amount, if applicable.

Enter code 1 or 7 for Traditional IRA, code J, Q, or T for Roth IRA, whichever is applicable.Check IRA/SEP/SIMPLE box for Traditional IRA, but not for Roth IRA.

Boxes 12-17: enter state and local withholding amounts, if applicable.

IRA Reporting • 115

Military and Disaster-Related Contributions

When certain military operations are initiated or disaster events occur, executive orders or laws may be enacted designating the relative locations as combat zones, qualified hazardous duty areas, or federally-declared disaster areas. In addition, the Secretary of Defense may designate certain military actions as contingency operations. The law provides special tax benefits to members (and their spouses) serving in or in support of designated combat zones (IRC Sec. 7508), hazardous duty areas, and contingency operations. The tax benefits include, among other things, postponements for making IRA contributions, filing tax returns, paying taxes, and filing a refund claim.

The extended deadline to complete related tax actions (including making IRA contributions) for military personnel serving in a combat zone generally is

• 180 days after the last day an IRA owner served in the area (or the last day of qualified hospitalization because of combat zone related injuries), plus

• the number of days that remained to complete the tax action for the applicable year when the IRA owner entered the combat zone or contingency operation.

Form 5498 Reporting Methods for Combat ZonesThe Instructions for Forms 1099-R and 5498 indicate a qualifying combat zone (or hazardous duty area) individual must designate the IRA contribution for a prior year to claim it as a deduction on the individual’s income tax return. If a qualifying combat zone individual makes a contribution to an IRA after April 15 and designates the contribution for a prior year, the financial organization must report the contribution either

• on the Form 5498 of the year for which the contribution was made (e.g., a 2015 Form 5498 for contributions made for 2015), or

• on a subsequent year Form 5498 (e.g., a 2017 Form 5498 for contributions made for 2015).

If reporting the contribution on the year’s form for which it is made, no special reporting is required. Include the contribution in Box 1 of Form 5498 or of a corrected Form 5498 if an original was previously filed. If reporting the contribution on a Form 5498 of a subsequent year, financial organizations must include the contribution amount in Box 13a, Postponed contribution, the year for which the contribution was made in Box 13b, Year, and one of the following indicators in Box 13c, Code.

• EO13119 (or PL106-21) for Yugoslavia operations area

• EO13239 for Afghanistan and associated direct support areas

• EO12744 for the Arabian Peninsula areas

For example, when reporting a 2015 $5,000 IRA contribution designated for EO13239 on a 2017 Form 5498, a financial organization should enter “5000” in Box 13a, “2015” in Box 13b, and “EO13239” in Box 13c. These amounts should not be included in Boxes 1 or 10.

The Instructions for Forms 1099-R and 5498 contain detailed descriptions of the specific locations for each zone or support area. Further changes to the combat zones (or hazardous duty areas) and to direct support areas as designated by the President or the Secretary of Defense may take place after the release of these instructions. The IRS notes that such changes, when applicable, may be found at the Form 5498 page at the IRS website. More information on the combat zone areas can be found in IRS Publication 3, Armed Forces’ Tax Guide. Financial organizations may rely on the information provided by the person making the IRA contribution.

116 • IRA Reporting

Postponed Military-Related Contributions in a Subsequent Year

The Form 5498 instructions also indicate that financial organizations may request a waiver from the requirement to file combat zone Forms 5498 electronically by submitting Form 8508, Request for Waiver From Filing Information Returns Electronically. Once the waiver is granted, financial organizations may report all Forms 5498 for combat zone participants on paper. Alternatively, financial organizations may report contributions made by the normal contribution due date electronically, and report the contributions made after the normal contribution due date on paper. Financial organizations also may report prior-year contributions by combat zone participants on corrected Forms 5498 electronically.

Postponed Contributions for Disaster AreasIRC Sec. 7508A provides the IRS with the authority to extend legal tax filing and payment deadlines as outlined in Treas. Reg. 301.7508A-1(c)(1), and the IRS issues guidance (usually in the form of news releases) for individuals who are affected by a federally-declared disaster area, terroristic act, or military action (as defined by IRC Sec. 165(h)(3)(C)(i)). Although the IRS may extend deadlines for up to one year under the current statute, the actual length of each extension is determined on a case-by-case basis, and may be considerably less than one year. The deadline for tax acts that fall within the defined period generally are extended. Individuals needing specific details or assistance regarding recent disasters should check the IRS website or call the IRS disaster hotline at 866-562-5227.

Among the tax acts that may be postponed if falling within the time period is making Traditional and Roth IRA contributions. Financial organizations report these on Form 5498 in Boxes 13a, 13b, and 13c, similar to postponed contributions by personnel serving in or in support of combat zones. The Box 13c indicator code for disasters is “FD.”

Enter year-end fair market value.

13a – Contribution amount13b – Year for which contribution is

made

13c – Enter EO13119 or PL106-21 for Yugoslavia operations area, EO13239 for Afghanistan and direct support areas, and EO12744 for Arabian Peninsula areas.

Check IRA for a Traditional IRA or Roth IRA for a Roth IRA.

IRA Reporting • 117

Postponed Disaster-Related Contributions

Qualified Reservist Distribution RepaymentsA 10 percent early distribution penalty tax exception exists for eligible members of a U.S. military reserve component (including National Guardsmen) who are called to active duty and who take early distributions from IRAs and certain retirement plans (IRC Sec. 72(t)(2)(G)), as provided by the Pension Protection Act of 2006 and the Heroes Earnings Assistance and Relief Tax Act of 2008. These individuals may also recontribute (i.e., repay) the qualified reservist distributions to an IRA if done within two years after the end of the active duty period.

Financial organizations report qualified reservist distributions on Form 1099-R in the same way they would if the penalty tax would apply (generally code 1 for Traditional IRAs, and code J for Roth IRAs). Taxpayers claim the penalty tax exception for the reservist distribution on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

Financial organizations report repayments of qualified reservist distributions to IRAs on Form 5498 in Boxes 14a and 14b. The Box 14b indicator code for qualified reservist distribution repayments is “QR.” Taxpayers will report the distributions on Form 8606, Nondeductible IRAs, because the repayments create after-tax basis in the IRAs. Taxpayers may not take deductions for the repaid amount.

Enter year-end fair market value.

13a – Contribution amount13b – Year for which contribution is made13c – Enter FD

Check IRA for a Traditional IRA or Roth IRA for a Roth IRA.

118 • IRA Reporting

Repayment of Qualified Reservist Distributions

Qualified Disaster Distribution RepaymentsWhen certain disaster events occur, the President may issue executive orders designating the relative locations as federally declared disaster areas. As a result, the IRS may provide guidance allowing for tax deadline postponements and laws may be enacted to give taxpayers other tax relief. This sometimes includes allowing eligible individuals to take IRA distributions without being subject to the early distribution penalty tax. Special provisions also may allow for repayments of the qualified disaster distributions to IRAs. Typically, these repayments have to be made within three years after receiving the distribution (beginning with the day after the day that the distribution is received), and are reported on Form 5498 in Boxes 14a and 14b. The Box 14b indicator code for these repayments is “DD.” More information about disaster-related distributions and repayments can be found at the IRS website.

Qualified Hurricane DistributionsIn fall 2017, Congress passed the Disaster Tax Relief and Airport and Airway Extension Act of 2017, which provided various tax-related relief to qualifying victims of Hurricanes Harvey, Irma, and Maria. This legislation allows eligible IRA owners and retirement plan participants to take “qualified hurricane distributions” from their IRAs and retirement plan accounts up to an aggregated $100,000. Such distributions may be repaid (i.e., rolled over) to an IRA or retirement plan within three years starting on the day after the distribution is received.

Financial organizations should report these 2017 distributions on Form 1099-R using code 2, Early distribution, exception applies, in Box 7. In February 2018, the IRS released Form 8915B, Qualified 2017 Disaster Retirement Plan Distributions and Repayments, for individuals to report the taxation and repayment of their qualified 2017 disaster distributions.

Enter year-end fair market value.

14a – Amount of repayment14b – Enter QR

Check IRA for a Traditional IRA or Roth IRA for a Roth IRA.

Check if Traditional IRA owner must take an RMD in 2018.

IRA Reporting • 119

Qualified 2016 Disaster DistributionsIn December 2017, Congress passed the Tax Cuts and Jobs Act of 2017, which allowed qualifying victims of 2016 federally declared disaster areas to take qualified distributions of up to $100,000 from IRAs and eligible retirement plans. These distributions are exempt from the 10 percent early distribution penalty tax and may be repaid (i.e., rolled back over) to an IRA or retirement plan within three years of taking the distribution. Distributions not repaid generally will be taxed ratably over a three-year period, unless the individual elects otherwise. These provisions were effective December 22, 2017, and applied to distributions taken on or after January 1, 2016, and before January 1, 2018.

As of this writing, the IRS had not released specific guidance on how financial organizations should report these distributions and repayments. The IRS did, however, release Form 8915A, Qualified 2016 Disaster Retirement Plan Distributions and Repayments, also in February 2018 for individuals to report the taxation and repayment of their qualified 2016 disaster distributions.

Qualified Wildfire DistributionsIn February 2018, Congress passed the Bipartisan Budget Act of 2018, which includes relief for individuals whose principal residence was within the declared California wildfires disaster area between October 8, 2017, and December 31, 2017, and who have suffered an economic loss as a result of the wildfires. These individuals are allowed to distribute up to $100,000 in aggregate from their IRAs and eligible retirement plans on or after October 8, 2017, and before January 1, 2019, as “qualified wildlife distributions.” These qualified wildfire distributions are exempt from the 10 percent early distribution penalty tax.

Similar to qualified hurricane and qualified 2016 disaster distributions, qualified wildfire distributions are not subject to the 10 percent early distribution penalty tax. Those who receive these qualified distributions will include the distributions in their gross income ratably over three years, beginning with the tax year of the distribution, unless they elect to include the distributions in their gross income for the distribution year. Individuals have the option to repay (i.e., roll back over) qualified wildfire distributions to an IRA or eligible retirement plan within three years of receipt. Any repayments made before the individual’s tax return due date plus extensions reduces the amount that they must include in income.

As of this writing, the IRS had not released specific guidance on how financial organizations should report these distributions and repayments. Qualified wildfire distribution recipients must file IRS Form 8915B, Qualified 2017 Disaster Retirement Plan Distributions and Repayments, with their 2017 federal income tax return to report the distributions and any timely repayments.

NOTE: Although repayments of qualified disaster distributions are similar to rollovers, they are treated as trustee-to-trustee transfers and are not subject to the one-per-12-month rule.

120 • IRA Reporting

Disaster Distribution Repayments

Endowment Contract IRAs

There are two types of IRAs: individual retirement (IR) accounts and IR annuities. By definition, neither IR accounts nor IR annuities generally may hold life insurance. But there is one exception. IR annuities issued before November 6, 1978, could have been established using endowment contracts (IRC Sec. 408(b)). Endowment contracts essentially are annuities that also provide life insurance protection.

Although it has been many years since taxpayers could establish endowment contract IRAs, IR annuity providers (typically insurance carriers) still may be maintaining existing contracts. Endowment contract IRAs must be maintained in accordance with IRA rules and regulations, including a special reporting requirement when premiums are made to these types of IRAs.

Endowment contract IRAs have fixed rate premiums. According to IRC Sec. 219(d)(3) and Prop. Treas. Reg. 1.219(a)-2(b)(4), no IRA deduction is allowed for amounts paid from an endowment contract IRA that are allocable to the cost of life insurance. Under the instructions for Form 5498, endowment contract IRA providers must report the gross amount of an IRA client’s premium, including the amount allocable to the cost of life insurance, in Box 1. In Box 6, endowment IRA contract providers must report only the amount of a taxpayer’s IRA contribution that is allocable to the cost of life insurance.

If a premium is no longer being made to an endowment contract IRA but assets still remain in the IRA, the financial organization must still generate a Form 5498 for the IRA owner reporting the IRA’s fair market value in Box 5.

Enter year-end fair market value.

14a – Repayment amount14b – Enter DD.

Check IRA for a Traditional IRA or Roth IRA for a Roth IRA.

IRA Reporting • 121

IRA Revocations or Account Closures

Financial organizations must report IRA revocations to the IRS. Typically, financial organizations report the initial contribution on Form 5498 and the resulting distribution on Form 1099-R. The reporting requirements depend upon the type of contribution that is used to open the IRA. Financial organizations must return the full amount contributed, but the Instructions for Forms 1099-R and 5498 indicate that a financial organization may return earnings on the contribution at its discretion.

The Instructions for Forms 1099-R and 5498 also include guidance for reporting the distribution of IRA assets resulting from an IRA account closure. The IRS explains that the same reporting rules apply as for revocations if the IRA “is closed at any time by the IRA trustee or custodian due to a failure of the taxpayer to satisfy the Customer Identification Program requirements described in Section 326 of the USA PATRIOT Act.”

The various codes that financial organizations may use in Box 7, Distribution code(s), of Form 1099-R depend on the type of contribution made.

The codes used for reporting distributions in 2017 resulting from revoked or closed IRAs, as described in the following sections, are

• code 1, Early distribution, no known exception,

• code 7, Normal distribution,

• code 8, Excess contributions plus earnings/excess deferrals (and/or earnings) taxable in 2017,

• code J, Early distribution from a Roth IRA, and

• code S, Early distribution from a SIMPLE IRA in the first 2 years, no known exception.

Regular ContributionIf an IRA owner opens an IRA with a regular contribution and subsequently revokes the IRA within seven calendar days of establishment or if the IRA is closed, financial organizations must report the contribution as a regular contribution (Box 1 of Form 5498). The distribution should be reported on Form 1099-R. Enter the gross distribution in Box 1 of Form 1099-R. If no earnings are distributed, enter 0 (zero) in Box 2a, Taxable amount, and code 8 in Box 7 for a Traditional IRA, and code J for a Roth IRA. If earnings are distributed, enter the amount of earnings in Box 2a, and enter codes 1 and 8, if applicable, in Box 7 for a Traditional IRA and codes J and 8, if applicable, for a Roth IRA. These earnings may be subject to the 10 percent early distribution penalty tax.

Rollover ContributionIf an individual opens an IRA with a rollover contribution and subsequently revokes the IRA within seven calendar days of establishment or the IRA is closed, financial organizations must report the contribution as a rollover contribution (Box 2 on Form 5498). Likewise, the payer must report the distribution made to the individual pursuant to the revocation as an IRA distribution on Form 1099-R.

If a rollover contribution is made to a Traditional or Roth IRA that later is revoked, enter in Boxes 1 and 2a of Form 1099-R the gross distribution and the appropriate code in Box 7 (i.e., code 1 for Traditional IRA owners under age 59½, code 7 for Traditional IRA owners age 59½ or older, and code J for a Roth IRA).

122 • IRA Reporting

Transfer ContributionRevenue Procedure 91-70 points out that if an IRA is established with a transfer contribution and then subsequently revoked or closed during the seven-day revocation period, the receiving organization should not report the contribution on Form 5498. The receiving financial organization should, however, report the distribu tion made pursuant to the revocation on Form 1099-R. As with rollover contributions, financial organizations generally must report the distribution of a revoked transfer as either a code 1 or code 7 for Traditional IRAs, and code J for Roth IRAs.

Conversion or Retirement Plan-to-Roth IRA RolloverIf a Roth IRA established with a conversion contribution or a rollover from an employer-sponsored retirement plan is later revoked or closed, and a distribution is made to the taxpayer, enter the gross distribution in Box 1 of Form 1099-R. If no earnings are distributed, enter 0 (zero) in Box 2a and code J in Box 7. If earnings are distributed, enter the amount of the earnings in Box 2a and code J in Box 7. These earnings may be subject to the 10 percent early distribution penalty tax.

Fair Market Value ReportingIn addition to addressing how IRA revocations affect contribution (Form 5498) and distribution (Form 1099-R) reporting, Revenue Procedure 91-70 states that if a revoked IRA is in existence as of December 31, the financial organization must report the IRA’s fair market value (FMV) on such date to both the IRA owner (on an FMV statement) and to the IRS (on Form 5498). If both the IRA contribution and the revocation of the IRA occur in the same year, the contribution must be reported but the FMV need not be because it will be zero.

Mergers and Acquisitions

The IRS provides reporting guidelines to financial organizations administering IRAs who have IRS reporting responsibilities. Reporting requirements in the wake of a merger or acquisition are discussed in Revenue Procedure 99-50 and in the General Instructions for Certain Information Returns.

Standard Merger Reporting ProcedureEach person or entity that makes or receives payments or withholds or collects federal income taxes that are reportable on Form 1099-R, Form 5498, Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, and on certain other forms generally is responsible for reporting those transactions to the IRS. The standard reporting procedure that applies in the case of a merger or acquisition requires both the predecessor and the successor entities to file the information returns to report transactions occurring in the year of acquisition.

Alternative Combined ProcedureIf certain requirements are met, the successor organization in a merger or acquisition may apply a simplified, combined reporting procedure for the previously mentioned reports. The successor organization may use the combined reporting procedure only if

• the successor entity acquires substantially all the property used in the predecessor’s trade or business, or used in a separate unit of the predecessor’s trade or business;

• the predecessor is required to file information returns to report transactions before the acquisition;

• the predecessor does not carry out reportable transactions after the acquisition;

IRA Reporting • 123

• the successor satisfies the combined reporting requirements of Rev. Proc. 99-50; and

• IRS reporting instructions for specific forms do not prohibit the use of the alternative reporting procedure.

To apply the alternative combined reporting procedure, the predecessor and the successor organizations must satisfy the following steps.

1. The predecessor and successor organizations must agree upon the specific reporting forms to which the alternative procedure applies. Both organizations may agree to use the alternative reporting method for all forms listed, or limit the use of the alternative procedure to specific forms.

2. Under the alternative method, on each form filed on behalf of an individual, the successor must aggregate the pre-acquisition information of the predecessor organization with its own information.

3. The successor organization must file a statement with the IRS, indicating that the appropriate forms are being filed on a combined basis according to Rev. Proc. 99-50.

Statement RequirementsThe required statement must include the names, addresses, telephone numbers, and employer identification numbers of both the successor and predecessor organizations, and the name and telephone number of the person responsible for preparing the statement.

The successor organization must attach the statement for Form 1042-S to Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and mail both to the address for filing Form 1042. In contrast, the successor organization must file the statement for Forms 1099-R and 5498 separately from the actual forms themselves and separately from Form 945, Annual Return of Withheld Federal Income Tax. The successor organization should mail the statement for Forms 1099 and 5498 on or before the due date of such forms to the address given in the form instructions.

Reporting Corrections

The Instructions for Forms 1099-R and 5498 state that financial organizations should correct forms “as soon as possible” following the discovery of an error. IRS Publication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G, states that filers generally should submit corrections for returns filed within the last three calendar years. A provision in the Consolidated Appropriations Act of 2016 (P.L. 114-113) created a Form 1099 series safe harbor for de minimis errors, and the IRS released Notice 2017-09 to provide additional guidance. An error of $100 or less on the amount of a distribution, or a withholding amount error of $25 or less, does not need to be corrected by issuing a revised Form 1099-R, unless requested by the taxpayer. This change applies to forms required to be filed after December 31, 2016 (2016 and later tax year forms).

Financial organizations that send 250 or more corrections of any Forms 5498 or 1099-R are required to send the corrections electronically. The limit applies separately to each form. So if there are fewer than 250 corrections of any one form, the corrections may be submitted on paper. IRS Publication 1220 contains instructions on how to file corrections electronically. Correction procedures for paper forms are contained in the General Instructions for Certain Information Returns. The procedures for correcting the Forms 5498 and 1099-R electronically generally are the same as those for paper corrections and depend on the type of error.

NOTE: An incorrect payee address does not require a corrected information return. This is effective beginning with corrections done in 2015, including corrections done for prior years.

124 • IRA Reporting

Transmittal FormFinancial organizations must use Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to transmit paper corrections as well as original forms. (Do not use Form 1096 to transmit corrections electronically.) When using Form 1096 to transmit corrections, financial organizations generally should check the appropriate box denoting the type of return being corrected.

Paper Corrections Requiring One FormThe most common errors on reporting forms generally require a single form to make the correction. These errors include incorrect distribution or contribution amounts, incorrect distribution code or checkbox, and a transfer reported as a rollover. The correction process consists of the following steps.

1. Prepare a new information return (Form 5498 or 1099-R).

a. Enter an “X” in the “CORRECTED” box at the top of the form.

b. Correct any information that was incorrect on the original (e.g., the incorrect dollar amount or distribution code). Enter all other information as it appeared on the original return.

NOTE: If a transfer was reported as a rollover, enter zero (-0-) for the dollar amounts on Form 1099-R (Boxes 1 and 2a for Traditional IRAs, Box 1 for Roth IRAs) to nullify the distribution report. If there were valid distributions during the year, however, reduce the dollar amount by the amount of the transfer.

2. Prepare a new transmittal Form 1096, providing all requested information as it relates to the return being corrected.

3. File Form 1096 and Copy A of the appropriate reporting form with the IRS. (Do not include a copy of the original return that was filed incorrectly.) Forward the recipient’s copy to the IRA owner.

IRA Reporting • 125

EXAMPLE: Incorrect distribution code

ABC Bank123 Main St.Anytown, USA 12345

5,734

5,734

94857 111-22-3333

Mary Smith

456 Oak Street

Anytown, USA 12345

1 X

X

X

CORRECTION

CORRECTIONFORM

ABC Bank123 Main St.Anytown, USA 12345

5,734

5,734

94857 111-22-3333

Mary Smith

456 Oak Street

Anytown, USA 12345

7 X

X

ORIGINAL

ORIGINAL

126 • IRA Reporting

Paper Corrections Requiring Two FormsCertain types of reporting errors require the submission of two separate reporting forms to correct the error. If a reporting form contains an incorrect or no identifying payee (IRA owner or beneficiary) Social Security number or tax identification number (TIN), or an incorrect payee name, two correction forms are required. (The General Instructions for Certain Information Returns add separate instructions for reporting an incorrect payer name and/or TIN, discussed in the following section.) The first form is used to identify the incorrect return submitted to the IRS. The second form is used to report the correct information. Again, these forms are transmitted to the IRS accompanied by a Form 1096. According to the Form 1099-R instructions, financial organizations need not attach a separate Form 1096 to both of the correction forms. One Form 1096 in each of the following scenarios suffices.

Correction Form 1Prepare a new information return (Form 5498 or 1099-R).

1. Enter an “X” in the “CORRECTED” box at the top of the form.

2. Enter the payer, recipient, and account number information exactly as it appeared on the original incorrect return.

3. Enter zero (-0-) for all money amounts. This will nullify the original reporting.

Correction Form 2Prepare a second information return.

1. Do NOT enter an “X” in the “CORRECTED” box at the top of the form. Prepare the form as though it is an original submission.

2. Include all the correct information on the new form.

Form 1096Prepare a transmittal Form 1096.

1. Provide all requested information as it relates to the return being corrected.

2. In the bottom margin of the form, type “Filed to Correct TIN,” “Filed to Correct Name,” or “Filed to Correct Return,” whichever is applicable.

3. File Form 1096 and copy A of both returns with the IRS. (Do not include a copy of the original return that was filed incorrectly.) Forward the recipient’s copies of the forms to the IRA owner.

IRA Reporting • 127

EXAMPLE: Incorrect Social Security number on original return

ABC Bank123 Main St.Anytown, USA 12345

John Jones

3456 Maple Ave.

Anytown, USA 12345

94857 555-44-4002 550X

ORIGINAL

ABC Bank123 Main St.Anytown, USA 12345

0

John Jones

3456 Maple Ave.

Anytown, USA 12345

94857 555-44-4002

CORRECTIONForm 1

X

X

ABC Bank123 Main St.Anytown, USA 12345

550

John Jones

3456 Maple Ave.

Anytown, USA 12345

94857 555-44-4004

CORRECTIONForm 2

X

128 • IRA Reporting

Another type of common error also requires two separate forms for correction. When a distribution is made to the beneficiary of a deceased IRA owner, the Form 1099-R reporting is done in the name and Social Security number (or tax identification number) of the beneficiary. Sometimes data systems err and generate the reporting in the deceased IRA owner’s name and Social Security number. The original incorrect form must then be zeroed out and a correct original form must be sent. Follow the same two-form procedures as described previously, but forward the recipient’s copies to the beneficiary. Again, only one Form 1096 is required.

EXAMPLE: Distribution made to beneficiary but reported in name of decedent

ABC Bank123 Main St.Anytown, USA 12345

6,230

6,230

94857 456-78-9123

Agnes Moore

983 Spruce Blvd.

Anytown, USA 12345

7 X

X

ORIGINAL

ORIGINAL

CORRECTIONForm 1

ABC Bank123 Main St.Anytown, USA 12345

0

0

94857 456-78-9123

Agnes Moore

983 Spruce Blvd.

Anytown, USA 12345

7 X

X

IRA Reporting • 129

Reporting Incorrect Payer Name and/or TINThe General Instructions for Certain Information Returns include separate instructions for correcting a payer TIN and name. Financial organizations that discover an error in reporting their name and TIN should write a letter to the IRS containing the following information.

• Name and address of the payer

• Type of error (including the incorrect payer name/TIN that was reported)

• Tax year

• Payer TIN

• Transmitter control code (TCC), if applicable

• Type of return

• Number of payees

• Filing method (paper or electronic)

• Whether federal income tax was withheld

The letter should be sent to the following address.

Internal Revenue ServiceInformation Returns Branch230 Murall DriveMail Stop 4360Kearneysville, WV 25430

If a large number of incorrect information returns have been filed or if there has been duplicate reporting, the financial organization should call the information reporting customer service at 866-455-7438.

ABC Bank123 Main St.Anytown, USA 12345

6,230

6,230

94857 345-67-9456

Daniel Doe

5324 Pine Plaza

Anytown, USA 12345

4 X

CORRECTIONForm 2

X

130 • IRA Reporting

Fair Market Value Statements

One of the first reports due out each year is the fair market value (FMV) statement. IRS News Release 87-70 indicates that financial organizations must provide annual statements to IRA owners and beneficiaries (if applicable) to give the previous year’s December 31 FMV of their IRAs. They must provide the FMV report even when no contributions are made to the IRA for that year.

The FMV may be presented in any type of written format and is due to IRA owners by January 31. If the deadline falls on a Saturday, Sunday, or legal holiday, the deadline is extended to the following business day. The FMV statement need only be sent to the IRA owner or beneficiary if the IRA owner is deceased; the IRS does not receive a copy. A financial organization also must include the FMV on the Form 5498, which it files each year with the IRS by May 31.

In a year in which the financial organization does not issue a Form 5498 or an account statement to the IRA owner because no IRA contributions were made for the year, the FMV statement must contain a legend designating which information is being provided to the IRS on Form 5498. (Account statements are discussed in the next section.)

Fair Market Value DefinitionMany questions have arisen on the definition of fair market value. The current understanding is that an IRA’s FMV is equal to what the IRA owner would be entitled to receive (not taking into account any early withdrawal penalties, etc.) if she demanded payment on December 31. In other words, the IRA’s FMV is equal to the IRA’s balance plus the accrued but unposted earnings as if the financial organization were to post the earnings on December 31. This definition may cause problems for some financial organizations. The IRS has informally stated that if this definition cannot be used, the financial organization may use another definition (such as posted interest only), provided that the definition is applied consistently.

FMV statements are required for IR annuities as well as IR accounts, including those annuities that have been annuitized. The IRS has not provided any specific guidelines for FMV reporting for annuitized IRAs. The IRS requires FMVs to be determined and reported in a sensible and consistent manner for all IRAs, with no known exemption for those that have been annuitized. Ascensus recommends that a good-faith effort be made to determine and report representative FMVs.

FMV When IRA Owners DieRevenue Procedure 89-52 addresses the FMV statement and Form 5498 reporting requirements for IRAs of deceased IRA owners. For the year an IRA owner dies, the financial organization must generate at least two Forms 5498. One Form 5498 reports the IRA’s FMV with regard to the deceased IRA owner and the other Form 5498 will report the FMV with regard to the beneficiary or beneficiaries. (Form 5498 and the FMV statement need not be generated for any beneficiary whose share of the IRA is depleted by the end of the year of death.) The IRS has provided two methods to accomplish this reporting. Financial organizations may choose to use either method following the procedures as defined next, but most financial organizations use Method 2, the “alternate method.”

Method 1• On the Form 5498 for the deceased IRA owner, the financial organization will show the IRA’s FMV

as of the date of the IRA owner’s death.

• On the Form 5498 for each beneficiary, the financial organization will show the FMV of the beneficiary’s share of the IRA as of December 31 of the year of death. The financial organization will not generate a Form 5498 for a beneficiary who has taken a total distribution of his portion of the IRA before December 31.

IRA Reporting • 131

Method 2 (the alternate method)• On the Form 5498 for the deceased IRA owner, the financial organization will show the IRA’s FMV

as of December 31 of the year of death. Any amount shown as the beneficiary’s share cannot also be shown on the decedent’s Form 5498 as attributable to the decedent. Therefore, the Form 5498 for the deceased IRA owner usually will show a December 31 FMV of zero.

• On the Form 5498 for each beneficiary, the financial organization will show the FMV of the beneficiary’s share of the IRA as of December 31 of the year of death.

• If the financial organization chooses to use method 2, the financial organization must inform the personal representative of the estate of his right to request a date of death valuation. This information may be placed in the empty boxes on Form 5498. The financial organization must supply the information within 90 days of the request.

In the years following the year of death, the financial organization should generate a Form 5498 for each beneficiary that has an interest in the IRA. Forms 5498 generated for beneficiaries should be titled to also show the original owner of the IRA assets, such as “Carl Duncan as beneficiary of Anita Bach” rather than just “Carl Duncan.”

If the financial organization is not notified of the IRA owner’s death until after the Form 5498 May 31 due date, the financial organization is not responsible for corrective reporting.

In the Instructions for Forms 1099-R and 5498, the IRS addresses the issue of titling Form 5498 if there are successor beneficiaries who inherit the IRA assets. The instructions state that when an IRA beneficiary dies and a successor beneficiary begins to receive distributions, the form titling discussed previously will change. For Form 5498 titling purposes, the first beneficiary assumes the place of the deceased IRA owner and the successor beneficiary assumes the place of the original beneficiary.

For example, Anita Bach has named Carl Duncan as the beneficiary of her IRA. Anita dies in 2017. Carl does not take a distribution in the year of death. The titling on Carl’s Form 5498 for 2017 will read “Carl Duncan as beneficiary of Anita Bach.” In 2018, Carl dies. Before he died, Carl named a successor beneficiary, Ellen Foster, to continue his IRA distributions. The titling on Ellen’s Form 5498 for 2018 will read “Ellen Foster as beneficiary of Carl Duncan.” The final Form 5498 for Carl (generated for the year of death) will read “Carl Duncan as beneficiary of Anita Bach.”

Account Statements

Financial organizations generally must provide an account statement to IRA owners (and beneficiaries, if applicable) by May 31 each year to report the prior year’s contribution activity. If the deadline falls on a Saturday, Sunday, or legal holiday, the deadline is extended to the following business day. For years in which there are no contributions, an account statement need not be provided as long as the IRA owner is provided a statement of the fair market value that includes a notice indicating which information is being filed with the IRS.

The account statement includes information regarding the prior year and must include the following.

• The amount of regular contributions made in or for the prior year

• The amount of rollover, conversion, and recharacterized contributions

• In the case of an endowment contract, the amount of the premium paid allocable to the cost of life insurance

132 • IRA Reporting

• An indication of whether the statement is being filed for a Traditional IRA, Roth IRA, savings incentive match plan for employees of small employers (SIMPLE) IRA, or an IRA containing simplified employee pension (SEP) plan contributions

• The amount of SEP plan contributions

• The amount of SIMPLE IRA contributions

• The financial organization’s name and address

• The IRA’s fair market value at the end of the year

• Instructions for the recipient similar to those on Form 5498

• Such other information as the IRS Commissioner may require

IRS Form 5498 as Account StatementsThe account statement is not a substitute for Form 5498; it is a separate report required by the Treasury regulations. The financial organization must provide the account statement annually to the IRA owner, while Form 5498 must be provided to the IRS. But a financial organization may use a copy of Form 5498 (or substitute Form 5498) to meet the account statement reporting requirement. Alternatively, the organization may elect to use another format, provided it includes the information listed above. If the Form 5498 is not used, the statement “This information is being furnished to the Internal Revenue Service” must appear on the account statement (Prop. Treas. Reg. 1.408-5(c)).

Using Substitute Forms 5498 for Account StatementsThe IRS permits a qualified substitute of Form 5498 to be used for account statements to IRA owners and IRA beneficiaries if it meets the requirements provided in Rev. Proc 2014-27 and Publication 1179. (See “Substitute Forms” explained earlier in this chapter.)

Account Statement and the FMV StatementIn Announcement 88-65, the relationship between the fair market value (FMV) statement and the account statement/Form 5498 is clarified. This announcement states that if a financial organization provides a statement of the IRA’s FMV by January 31 and no contributions were made to the IRA for the year being reported, then the financial organization need not provide an account statement (or Form 5498) to the IRA owner to report zero contributions. The financial organization must still file Form 5498 with the IRS by May 31 (or the following business day if May 31 falls on a Saturday, Sunday, or a legal holiday) to report the FMV.

Publication 1179 states that in a year in which the financial organization does not issue a Form 5498 or account statement to the IRA owner because no IRA contributions were made for the year, the FMV statement and required minimum distribution statement must contain a legend stating “This information is being furnished to the Internal Revenue Service” and designating which information is being furnished to the IRS on Form 5498.

IRA Reporting • 133

Required Minimum Distribution Statements

Treasury regulations for required minimum distributions (RMDs) require financial organizations to annually report the amount of RMDs to IRA owners subject to such distributions. Notice 2002-27 describes the options available to financial organizations for satisfying the RMD reporting requirements, specifically for Traditional and SIMPLE IRAs. Notice 2003-3 adds further clarification.

RMD Statement ProceduresEffective for 2003 and later, if an RMD is required to be taken from an IRA for the year and the IRA owner is alive at the beginning of such year, the financial organization holding the IRA (as of December 31 of the prior year) must provide a statement to the IRA owner by January 31 of the year for which the distribution is required. If the deadline falls on a Saturday, Sunday, or legal holiday, the deadline is extended to the following business day. The financial organization may provide this statement in conjunction with the IRA’s FMV statement, which it also must provide to the IRA owner by January 31.

This RMD disclosure requirement generally does not apply to Roth IRA owners or IRA beneficiaries. But if a surviving spouse of an IRA owner is the sole beneficiary of an IRA and the IRA is retitled in her name (one method of treating the IRA as her own), the financial organization must report the RMD information to the surviving spouse as the IRA owner.

According to Notice 2002-27, financial organizations may choose one of two reporting alternatives to satisfy the requirement.

Alternative #1 – A financial organization provides a statement to the IRA owner that reports the RMD amount with respect to the IRA for the calendar year, and the date by which such amount must be distributed. The RMD may be calculated assuming that

• the sole IRA beneficiary is not a spouse more than 10 years younger than the IRA owner, and

• no amounts are received by the IRA after December 31 of the prior year.

Alternative #2 – A financial organization provides a statement to the IRA owner that

• informs the IRA owner that a minimum distribution with respect to the IRA is required for the calendar year,

• notifies the IRA owner of the date by which such RMD must be distributed, and

• includes an offer to provide the IRA owner, upon request, with a calculation of the RMD amount with respect to the IRA for that calendar year.

With Alternative #2, if the IRA owner requests an RMD calculation, the financial organization must calculate and report the RMD amount to the IRA owner.

Under both alternatives, the statement must communicate to the IRA owner that the financial organization will be reporting to the IRS that the IRA owner is required to receive an RMD for the year.

NOTE: See “Required Minimum Distributions” in Chapter 6, Miscellaneous Compliance Concerns, for details on how to calculate RMDs.

134 • IRA Reporting

RMD Statement Clarifications in Notice 2003-3As indicated in Notice 2003-3, the IRS allows for some flexibility in the use of Alternatives #1 and #2 when providing RMD statements to IRA owners. Specifically, financial organizations may use Alternative #1 in statements to some IRA owners and Alternative #2 for the remainder.

In addition, the notice provides guidance on how financial organizations may submit the statements electronically to IRA owners. IRA administrators may transmit the statements electronically only if procedures that apply to the electronic transmission of Forms W-2, Wage and Tax Statement, are satisfied, including the consent requirement described in regulations under IRC Sec. 6051. The General Instructions for Certain Information Returns, Part M, describe the procedures. (See “Electronic Withholding Elections” in Chapter 3, IRA Withholding, for more information on providing statements electronically.)

Using Form 5498 for RMD StatementThe IRS allows financial organizations to use Form 5498 to satisfy the RMD statement requirement to IRA owners if provided to the IRA owner by the January 31 RMD statement deadline. The instructions for Form 5498 indicate that financial organizations that use Form 5498 for the RMD statement should enter the date by which the RMD must be distributed in Box 12a, RMD date, and the RMD amount in Box 12b, RMD amount. When using Form 5498 for this purpose, a financial organization may have to submit a revised Form 5498 if the IRA owner makes a prior-year contribution.

Retain Record of the RMD StatementFailure to provide RMD statements violates IRS reporting requirements and, therefore, potentially subjects the financial organization to IRS penalty (IRC Sec 408(i) and Treas. Reg. 1.408-8). At the time of this writing the IRS had not yet specified what the penalty is. Because of potential penalties, however, financial organizations should retain records of the RMD statements and to whom the statements have been sent.

Reporting RMDs to the IRSFinancial organizations report in Box 11 on Form 5498 that an RMD is due to the IRA owner for the following year. They are not required to report any RMD information to the IRS other than the fact that an RMD is due. The Instructions for Forms 1099-R and 5498 provide a description of the notice requirements.

IRA Reporting Activity Log Sheet

Financial organizations are responsible for the accuracy of IRA reporting no matter who is actually generating the forms. IRA administrators should spot-check a set percentage of forms before they are forwarded to the IRS. Financial organizations also must generate and disseminate various reports annually to IRA owners. During an audit, an IRS examiner may check financial organization records to determine if these requirements have been met.

The following IRA Reporting Activity Log Sheet may be used (and revised as necessary) by financial organization personnel who are responsible for making sure IRS reporting (Forms 5498 and 1099-R) and IRA owner reports (fair market value statement, account statement, and required minimum distribution statement) is generated and timely distributed.

©2018 Ascensus, LLC

IRA Reporting Activity Log Sheet

Financial organization name ________________________________________________________________________

Reporting year ___________________________________________________________________________________

Form 1099-R

Format used: Paper Electronic

Due to IRS: February 28, 2019 April 1, 2019

Date sent: ______________________ ______________________

Due to IRA owners: January 31, 2019 Date sent ______________________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Form 5498

Format used: Paper Electronic

Due to IRS: May 31, 2019 Date sent ______________________________

Due to IRA owners: May 31, 2019 Date sent ______________________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Fair Market Value Statement

Due to IRA owners: January 31, 2019 Date sent ______________________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

©2018 Ascensus, LLC

Required Minimum Distribution Statement

Due to IRA owners: January 31, 2019 Date sent ______________________________

Included RMD amounts

Did not include RMD amounts

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Account Statement

Due to IRA owners: May 31, 2019 Date sent ______________________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Performing an Audit • 137

Chapter 5

Performing an AuditOverview

Survey IRA Forms

Survey IRA Operations

Survey IRA Owner Files

Reviewing Opening Documents

Reviewing Reporting Issues

Reviewing Withholding Requirements

Common IRA Compliance Errors

Remedies for Compliance Problems

Overview

The first step financial organizations should take to ensure that their IRA programs are being operated in compliance is to thoroughly review the current IRA rules and regulations. A comprehensive review is necessary before evaluating internal compliance because financial organizations should be able to recognize what the IRS views as required operations versus helpful customer service. Because of the sheer number of underlying regulations, distinguishing between what is a true compliance concern and what is being performed as a customer service may be difficult.

Once a financial organization understands current IRA compliance requirements, the next step is to begin a survey of the financial organization’s IRA forms and operations, followed by a survey of IRA files, to determine whether compliance procedures were followed in the past. The final step is to evaluate any areas of noncompliance and determine how to remedy the situation. The following sections outline how to survey IRA programs and how to correct compliance concerns identified from the surveys. Some financial organizations may wish to hire an outside firm to conduct a compliance review of their IRA programs to help ensure the program meets the IRA compliance requirements.

To remain compliant, financial organizations must closely follow legislative and regulatory developments that affect IRAs.

138 • Performing an Audit

Survey IRA Forms

IRA departments use a variety of specifically designed IRA transaction forms to gather the necessary information on IRA transactions and to help them perform proper IRA operations. Most IRA departments use contribution, distribution, withholding, recharacterization, conversion, transfer, rollover, direct rollover, and, perhaps, IRA election forms. Of course, all IRA departments must have the documents necessary to open IRA plans (i.e., IRA plan agreements, disclosure statements, and financial disclosures).

Before evaluating IRA operations, the individual conducting the survey (examiner) should gather all the IRA forms currently used in the IRA department. The forms should be the most recently revised versions available. The examiner may check with the IRA department’s forms provider, or if the forms are drafted by an attorney or by internal sources, check with the drafter of the forms to confirm that all IRA rules and reporting changes have been integrated into the forms.

IRA Document StatusThe checklists on the following pages will help an examiner audit and track the status of IRA forms and documents when doing an internal compliance audit. The forms on this list typically are necessary to help an IRA department meet the specific IRS compliance requirements. These forms are used to establish an IRA, to gather the information necessary for IRS reporting, and to record IRA owner elections. Note that some of these transactions, such as conversions and recharacterizations, may be documented using multiple forms (e.g., an IRA contribution form and a withdrawal form). Financial organizations may use other forms as well, such as transfer request forms or excess contribution forms, that prove useful to maintain efficient operations.

Performing an Audit • 139

Document Status Checklist: Traditional IRAs

General findings: _________________________________________________________________________________

________________________________________________________________________________________________

________________________________________________________________________________________________

Respond with YES, NO, or NA (where appropriate) to each of the following items.

Plan Agreement and Disclosure Statement

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Amendments

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Most recent amendment ___________________________________________

Yes No NA Proof that amendments were sent

Beneficiary Designation Notice

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Yes No NA Date of last beneficiary form mailing _________________________________

Contribution Form

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Yes No NA Contribution type selection included

Yes No NA Prior-year election opportunity included

140 • Performing an Audit

Contribution Eligibility Form

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Yes No NA Contribution type selection included

Yes No NA Eligibility for types of contribution included

Withdrawal Form

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Yes No NA W-4P (or substitute) included

Direct Rollover Request Form

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Yes No NA 70½ restriction is included

IRA Recharacterization Request

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Summary

Yes No NA All of the forms are in compliance

Forms not in compliance: ____________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Recommendations: _________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Performing an Audit • 141

Document Status Checklist: Roth IRAs

General findings: _________________________________________________________________________________

________________________________________________________________________________________________

________________________________________________________________________________________________

Respond with YES, NO, or NA (where appropriate) to each of the following items.

Plan Agreement and Disclosure Statement

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Amendments

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Most recent amendment ___________________________________________

Yes No NA Proof that amendments were sent

Beneficiary Designation Notice

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Yes No NA Date of last beneficiary form mailing _________________________________

Contribution Form

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Yes No NA Prior-year election opportunity included

Contribution Eligibility Form

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Yes No NA Contribution type selection included

Yes No NA Eligibility for types of contribution included

142 • Performing an Audit

Withdrawal Form

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Yes No NA W-4P (or substitute) included

Direct Rollover Request Form

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Yes No NA 70½ restriction is included

Direct Conversion Request

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Yes No NA 70½ restriction is included

IRA Recharacterization Request

Yes No NA Form title ________________________________________________________

Yes No NA Form is in compliance

Yes No NA Current copy revision date __________________________________________

Summary

Yes No NA All of the forms are in compliance

Forms not in compliance: ____________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Recommendations: _________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Performing an Audit • 143

Survey IRA Operations

The ideal comprehensive survey of operations should involve all IRA personnel and should review common IRA operations. The examiner should have each IRA employee perform mock IRA transactions in the same way that the transactions would be accomplished for an IRA owner. The examiner should follow each transaction procedure from beginning to end, from completing each form that is used in the transaction, to the entry of the information on the data system, to the eventual storage of the form.

Basic transactions that the examiner should evaluate are

• opening IRAs;

• accepting IRA contributions (including regular, spousal, transfer, rollover, recharacterization, and conversion);

• making distributions (including distributions following death and divorce);

• calculating required minimum distributions (RMDs) (see Chapter 6, Miscellaneous Compliance Concerns); and

• withholding on distributions.

Operational Procedures StatusWhen proper operational procedures are not followed, information required for IRA compliance may be missing. The errors might not be discovered until Forms 5498, IRA Contribution Information, and 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., are generated or until IRS staff show up for an audit. The following checklist will help an examiner review and track the employees’ understanding of the IRA procedures, and will help determine whether procedures could be improved upon. The checklist addresses those operations that fall under IRA compliance scrutiny. Financial organizations may have other procedures, such as those for IRA-to-IRA transfers, that add to efficient operations and can be incorporated into the audit of operations.

144 • Performing an Audit

Operational Procedures Status Checklist

General findings: _________________________________________________________________________________

________________________________________________________________________________________________

________________________________________________________________________________________________

Respond with YES, NO, or NA to each of the following items.

Opening an IRA

Yes No NA Employee has knowledge of opening process

Yes No NA IRA owner acknowledgment of receipt of documents placed in file

Yes No NA Employee accurately completes financial disclosure

Deposits

Yes No NA Employee is checking appropriate year

Yes No NA Employee requests IRA owner signature

Yes No NA Employee indicates type of contribution

Withdrawals

Yes No NA Employee knows how to calculate RMDs (or knows what resources are available)

Yes No NA Employee is marking distribution reason

Withholding

Yes No NA Employee is presenting withholding election in timely manner

Yes No NA Employee reports withheld funds to payroll (or other applicable entity)

Yes No NA Employee (or other entity) reports withheld funds to the IRS

Reporting

Yes No NA Spot check indicates accurate reporting

Yes No NA Corrections are made as soon as possible

Performing an Audit • 145

Employee Knowledge of Special Operations

Yes No NA Death distributions

Yes No NA Transfer

Yes No NA Rollover

Yes No NA Transfer because of divorce/legal separation

Yes No NA Recharacterizations

Yes No NA Roth IRA conversions

Summary

Recommendations: _________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

146 • Performing an Audit

Data Entry and File MaintenanceOnce the examiner has determined that all forms are correctly completed, the examiner should review the computer data entry procedures with appropriate personnel. IRA personnel responsible for data entry should understand what information they must include from the forms for IRS reporting purposes.

After entering data into the system, the original paper copies of the forms (if any) generally are filed. Originals may be placed in the individual file of each IRA owner. IRA administrators usually find that the copy placed in the IRA owner’s file is more accessible than copies filed in a group by form type or copies that are transferred to an electronic file (or other storage method used by the financial organization).

All IRA personnel should know where original forms are filed. Each IRA administrator should be able to reconstruct the entire history (all the transactions) of an individual’s IRA. Upon the IRA owner’s request, IRA personnel should be able to produce any IRA forms or reports for a particular IRA.

The following checklist will help an examiner track whether the transaction records are accessible and have the correct information, and whether the information was entered properly in the data storage system.

Performing an Audit • 147

Data Entry and File Maintenance Checklist

General findings: _________________________________________________________________________________

________________________________________________________________________________________________

________________________________________________________________________________________________

Respond with YES, NO, or NA to each of the following items.

Plan Agreement and Disclosure Statement

Yes No NA Acknowledgments signed and dated

Yes No NA Properly filed

Beneficiary Designation

Yes No NA All have address, relationship, and date of birth

Yes No NA Spousal waivers signed (if needed)

Yes No NA Properly filed

Contribution Forms

Yes No NA All designate year for which contribution made

Yes No NA Form 5498 matches

Yes No NA Properly filed

Withdrawal Forms

Yes No NA Withholding notice received

Yes No NA Withholding election made (if applicable)

Yes No NA Form 1099-R matches withdrawal form

Yes No NA Properly filed

Rollover Forms

Yes No NA Irrevocable rollover election (signature) for each rollover

Yes No NA Copy of check

Yes No NA Properly filed

148 • Performing an Audit

Roth IRA Conversion Forms

Yes No NA Irrevocable conversion contribution election (signature) for each conversion

Yes No NA Copy of check

Yes No NA Properly filed

Recharacterization Forms

Yes No NA IRA recharacterization properly documented

Yes No NA Copy of check

Yes No NA Properly filed

Transfer Forms

Yes No NA Copy of check

Yes No NA Check made payable to financial organization (if applicable)

Yes No NA Properly filed

Death Distributions

Yes No NA Copies of certified death certificate

Yes No NA Beneficiary designations properly filed

Summary

Recommendations: _________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Performing an Audit • 149

Survey IRA Owner Files

The most time-consuming step of an IRA compliance survey usually is the analysis of current IRA files. The examiner must determine if all IRS compliance requirements have been met from the time the IRA was opened until the date of the survey.

The first documents the examiner should look for are the IRA plan agreement and disclosure statement. The file should contain a signed copy of the plan agreement and disclosure statement or a statement signed by the IRA owner acknowledging that these documents were received.

Once the IRA has been established, the financial organization must amend the IRA any time there is a major tax law change or IRS pronouncement affecting IRAs. Either the plan agreement or disclosure statement or both may have required amending. The examiner should know what amendments have been required and when those amendments had to be made. Either the individual file or a master file should contain proof that each amendment was made to each IRA at the time the amendment was required.

Other important documents to examine from the IRA owner’s file are the various transactions forms. The information from these forms is used to report IRA transactions to the IRS on Forms 5498 and 1099-R. Financial organizations also have responsibility to apply federal, and sometimes state, income tax withholding, and to provide withholding notices each year. These records should be checked for compliance accuracy as well.

Reviewing Opening Documents

The first documents the examiner should look for in an IRA owner’s file are the IRA plan agreement and disclosure statement. The file should contain a copy of the plan agreement and disclosure statement signed by the IRA owner and financial organization, or a statement signed by the IRA owner acknowledging that these documents were received. The opening documents, whether IRS model documents or prototype documents, must be the most up-to-date documents available at the time that the IRA is opened.

An examiner may use the following checklist to record the status of the IRA owner’s opening documents.

150 • Performing an Audit

Opening Documents Checklist

Respond with YES, NO, or NA to each of the following items.

IRA owner name _________________________________________________________________________________

Plan Agreement

Yes No NA Signed and dated (or acknowledgment signed and dated)

Yes No NA Plan agreement was most current available at opening

Disclosure Statement

Yes No NA Signed and dated (or acknowledgment signed and dated)

Yes No NA Disclosure statement was most current available at opening

Financial Disclosure

Yes No NA Properly completed copy in file (not necessary if acknowledgement is retained)

Yes No NA Acknowledgement of receipt in file

Performing an Audit • 151

Amendments StatusOnce an IRA has been established, the financial organization may need to amend the IRA plan agreement or disclosure statement when there is a major tax law change or IRS pronouncement affecting IRAs. The plan agreement or disclosure statement, or both, may require amending following establishment. The IRA administrator should know which amendments were required and when the organization had to complete those amendments. Either the individual file or the master file should contain proof that each amendment was made to each IRA (and sent to each IRA owner, or beneficiary if applicable) at the time the amendment was required. The IRS may check this when they do an audit. See Chapter 2, Opening an IRA, for a list of all the required amendments and their contents, and for an IRA opening document log sheet that may be used and retained in IRA owners’ files.

Following is an abbreviated amendment list an examiner may use to assess whether the financial organization’s IRA documents are up to date.

152 • Performing an Audit

Amendments Status Checklist

Respond with YES, NO, or NA to each of the following items.

Plan Agreement

Amended for (amendments required for major law or regulatory changes following IRA revision date)

Yes No NA TRA-76

Yes No NA Revenue Act-78

Yes No NA ERTA-81

Yes No NA TEFRA-82

Yes No NA Announcement 88-27

Yes No NA Revenue Procedure 92-38

Yes No NA EGTRRA-01

Yes No NA Rev. Proc. 2002-10

Yes No NA RMD Regulations (TD 8987)-02

Yes No NA Announcement 2007-55 (prototypes only)

Yes No NA Rev. Proc. 2010-48 (prototypes only)

Yes No NA IRS model plan documents

Disclosure Statement

Amended for (amendments required/recommended for major law or regulatory changes following IRA revision date)

Yes No NA TRA-76

Yes No NA Revenue Act-78

Yes No NA ERTA-81

Yes No NA TEFRA-82

Yes No NA TRA-84

Yes No NA TRA-86

Yes No NA TAMRA-88

Yes No NA Revenue Procedure 92-38

Yes No NA UCA-92

Yes No NA SBA-96

Yes No NA TRA-97

Yes No NA TTCA-98 (Roth IRA only)

Yes No NA EGTRRA-01

Yes No NA Rev. Proc. 2002-10

Yes No NA RMD Regulations (TD 8987)-02

Performing an Audit • 153

Yes No NA REG-146459-05

Yes No NA KETRA-05

Yes No NA GO ZONE-05

Yes No NA TIPRA-05

Yes No NA PPA-06

Yes No NA TRHCA-06

Yes No NA Announcement 2007-55 (prototype Roth IRA only)

Yes No NA HEART Act-08

Yes No NA EES-08

Yes No NA WRERA-08

Yes No NA Rev. Proc. 2010-48 (prototypes only)

Yes No NA TRUIR and Job Creation Act-10

Yes No NA FAA Modernization & Reform Act-12

Yes No NA ATRA-12

Yes No NA Announcement 2014-15

Yes No NA QLAC Regulations (TD 9673)-14

Yes No NA FMRA-12 Amendment (P.L. 113-243)

Yes No NA CAA-16 (P.L. 114-113)

Yes No NA Rev. Proc. 2016-47

Yes No NA TCJA-17

Yes No NA BBA-18

Summary

Recommendations: _________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

154 • Performing an Audit

Beneficiary DesignationsAlthough naming beneficiaries is not an IRS requirement, it is important for both the financial organization and the IRA owner. An IRA owner may indicate on the IRA application or beneficiary form the individuals or entities that will have rights to any assets remaining in the IRA when the IRA owner dies. If proper procedures are followed, IRA administrators should have no difficulty in determining the proper recipient of the IRA assets. To ensure the validity of the beneficiary designation, the IRA owner should sign and date the beneficiary form. Many financial organizations require a witness to verify the IRA owner’s signature.

Reviewing Reporting Issues

The examiner should review previous IRA operations to determine whether the reporting to the IRS accurately reflects the IRA operations and whether there is sufficient documentation to protect the financial organization if an IRA owner challenges how an IRA transaction was processed.

Two primary IRA operations are accepting contributions and making distributions. The two IRS forms used to report these transactions are Form 5498, IRA Contribution Information, and Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. The examiner may wish to arrange an IRA file’s transaction and reporting forms into separate years for matching purposes because reporting requirements are subject to change from one year to the next. Each year’s contributions and distributions should be reflected on an annual report to the IRS.

Checking Contribution DocumentationIf a contribution to an IRA was received as a transfer, rollover, recharacterization, or conversion, the examiner should check to see that the documentation designating the type of contribution (contribution form, transfer request form, direct rollover request form, etc.) is retained in the file. The IRS does not require these forms, but most IRA administrators request them to facilitate transactions, obtain any required irrevocable elections, and to ensure proper reporting. The IRS requires IRA owners to make irrevocable elections for rollovers, recharacterizations, and conversion contributions. Examiners should check to make sure the IRA owner’s file contains these elections. These elections usually are a part of the rollover or contribution forms, or the direct rollover, direct conversion, or recharacterization request forms.

If an IRA contribution is made as a transfer, the examiner should check against the Form 5498 reporting for the year to make sure that the contribution was not reported, but was included as part of the IRA’s year-end value. If the contribution was made as an indirect or direct rollover, the examiner should check to see that the contribution was reported in the rollover contribution box of Form 5498. Conversions and recharacterizations also should be reported in the appropriate boxes on Form 5498.

Since 1997, financial organizations are required to report simplified employee pension (SEP) plan and savings incentive match plan for employees of small employers (SIMPLE) IRA contributions on Form 5498. The examiner could also check the Forms 5498 to ensure that those types of contributions were reported correctly. In addition, one or more of the checkboxes contained in Box 7 of Form 5498 must be checked to indicate the type of IRA for which the information is being reported: Traditional IRA, SEP, SIMPLE IRA, or Roth IRA.

An examiner may use the following checklist to record whether the proper contribution-related forms with the required information are contained in the IRA owner’s files.

Performing an Audit • 155

Traditional and Roth IRA Contributions Checklist

Respond with YES, NO, or NA to each of the following items.

IRA owner name _________________________________________________________________________________

Regular (Including Catch-Up and Spousal)

Yes No NA Contribution form

Yes No NA Contribution year shown

Yes No NA Contribution eligibility form

Yes No NA Signed and dated

Rollover

Yes No NA Contribution form

Yes No NA Contribution eligibility form

Yes No NA Signed and dated

Direct Rollover

Yes No NA Direct rollover request

Yes No NA Contribution form

Yes No NA Contribution eligibility form

Yes No NA Signed and dated

Transfer

Yes No NA Transfer request

Yes No NA Contribution form

Yes No NA Signed and dated

Roth IRA Conversion

Yes No NA Direct conversion request form

Yes No NA Contribution form

Yes No NA Contribution eligibility form

Yes No NA Signed and dated

156 • Performing an Audit

Recharacterization

Yes No NA Recharacterization request form

Yes No NA Contribution form

Yes No NA Signed and dated

Reporting Form 5498

Yes No NA Form 5498 matches contribution form

Summary

Recommendations: _________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

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Checking Distribution DocumentationChecking distribution forms against distribution reporting is more complicated than checking the contribution forms and reporting. For each IRA distribution, the examiner generally should find a withdrawal form and a withholding notice and election. Often the withdrawal and withholding information will be combined on one form, although the requirements for each should be surveyed separately.

The details requested on the withdrawal form (distribution amount, taxable amount, withheld amount, and distribution type) are gathered to provide a source for the required information to be reported on Form 1099-R. The examiner should check the withdrawal form against the reporting on Form 1099-R to make sure that the information was accurately entered on the computer system and transmitted to the form.

The examiner should confirm that IRA owners receiving distributions are provided with the withholding notice and election as often as is required by the regulations and that proof that the notice is being provided is being retained in the IRA owner’s file.

The examiner checking distributions made to IRA beneficiaries may expect to find a few additional documents in the IRA files. When a distribution is made to a beneficiary, the beneficiary generally should be asked to provide a certified copy of the IRA owner’s death certificate before a distribution will be made. The beneficiary also may be asked to complete a beneficiary election form before taking a distribution. Although the IRS does not require either of these documents, a financial organization’s IRA department policy may require them.

When the examiner checks reporting for a beneficiary distribution, the first concern is that the reporting was done in the beneficiary’s name and Social Security number. The examiner also should remember that the beneficiary is subject to the same withholding requirements as that of an IRA owner.

The examiner should be able to determine from the files whether the IRA department has met the compliance requirements in the major compliance areas of opening documents (including amendments), withholding, and reporting.

An examiner may use the following checklist to record whether the proper distribution-related forms with the required information are contained in the IRA owner’s files.

158 • Performing an Audit

Traditional and Roth IRA Distributions Checklist

Respond with YES, NO, or NA to each of the following items.

IRA owner name _________________________________________________________________________________

Distributions

Yes No NA Withdrawal statement

Yes No NA Withholding requirements met

Yes No NA Irrevocable election for rollover, conversion, recharacterization (if applicable)

Yes No NA Distribution reason provided

Reporting Form 1099-R

Yes No NA Form 1099-R matches withdrawal form

Distribution to Beneficiary

Yes No NA Withdrawal statement

Yes No NA Form W-4P (or substitute) provided

Yes No NA Beneficiary option election made

Yes No NA Certified copy of death certificate

Beneficiary Reporting Form 1099-R

Yes No NA Code 4, death distribution

Yes No NA Form 1099-R sent in beneficiary’s name and Social Security number

Year-of-Death Reporting

Yes No NA Year-of-death reporting properly done for IRA owner

Summary

Recommendations: _________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Performing an Audit • 159

Checking Annual StatementsFinancial organizations must send certain reports annually to IRA owners and beneficiaries (if applicable). As discussed in Chapter 4, IRA Reporting, fair market value (FMV) statements, required minimum distribution (RMD) statements, and account statements must be sent each year. These reports are not sent to the IRS, although the FMV is reported to the IRS on Form 5498. Some financial organizations also may send other reports or statements as a customer service. For example, some financial organizations send RMD reminders later in the year to IRA owners who have not yet taken their RMDs for the year. Any such statements may be incorporated into this audit.

An examiner may use the following checklist to record whether (and in what format) the required statements have been sent to IRA owners.

160 • Performing an Audit

Annual Statements Checklist

Respond with YES, NO, or NA to each of the following items.

IRA owner (or beneficiary) name ____________________________________________________________________

Fair Market Value Statement

Yes No NA Financial organization statement used

Yes No NA Year of death statements to IRA owner and beneficiary (if applicable)

Yes No NA Date sent

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

RMD Statement

Yes No NA Included RMD amount (Alternative 1)

Yes No NA Included offer to calculate RMD (Alternative 2)

Yes No NA Date sent

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

Account Statement

Yes No NA Financial organization statement used

Yes No NA Form 5498 used

Yes No NA Date sent

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

Annual Statements Summary

Recommendations: _________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

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Reviewing Withholding Requirements

Another IRS compliance concern is withholding. The financial organization should check files to make sure that the withholding requirements are met. The financial organization may face monetary fines if it does not meet the IRS requirements for withholding.

An examiner may use the following checklist to record the method the financial organization uses to send withholding notices to IRA owners, to track that withholding has been remitted to the IRS, and to track the status of the annual withholding reports (Forms 945, Annual Return of Withheld Federal Income Tax, and 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons) sent to the IRS.

162 • Performing an Audit

Federal Withholding Requirements Checklist

Respond with YES, NO, or NA to each of the following items.

Withholding Notice

Yes No NA Notice given at each distribution as part of withdrawal statement

Yes No NA Notice sent annually before the first payment each year (for quarterly or more frequently scheduled payments)

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

Withholding Remitted to IRS

Yes No NA Submitted using Electronic Federal Tax Payment System (EFTPS)

Yes No NA Other

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

Withholding Reported to IRS

Yes No NA Form 945 generated

Yes No NA Form 945-A generated (semiweekly depositors)

Yes No NA Form 1042 generated (withholding for nonresident aliens)

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

Federal Withholding Summary

Recommendations: _________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

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Common IRA Compliance Errors

While conducting compliance reviews, Ascensus consultants have documented a wide range of compliance problems. The following are among the most common problems noted.

• Files lack evidence that plan agreements have ever been amended, or files reflect that amendments occurred only occasionally.

• There is no evidence that disclosure statements have ever been amended, or there is evidence that amendments occurred only occasionally.

• Financial disclosure statements do not comply with regulations. The most common problems within this area occur when

– financial growth is based on something other than a $1,000 annual contribution,

– projections fail to reflect properly any early withdrawal penalty for time deposits, and

– no evidence is available that financial disclosures have been provided.

• Administrators fail to retain evidence that they provided Form W-4P, Withholding Certificate for Pension or Annuity Payments, or a substitute W-4P at the time of distribution.

• Neither an adequate hold harmless agreement nor a written irrevocable election are obtained when rollover contributions are accepted.

• Documentation regarding transfers to and from other financial organizations is absent, which often results in inconsistent reporting as either rollovers or taxable distributions.

• Government reporting is improperly completed.

• Files lack a signed contribution form or other written evidence that a client intended a contribution to be reported in a certain manner.

Here are some less common errors that have been found.

• Excess contributions directly transferred to a spouse’s IRA

• Joint IRAs (e.g., an IRA titled “Ma and Pa Jones IRA”)

• A memo in a file placing a hold on the individual’s IRA as collateral for an outstanding loan

Remedies for Compliance Problems

By the time an examiner finds compliance problems, there usually is no way to go back and make up for some action that should have been taken by a specific time. Occasionally, however, a financial organization can take some limited remedial action. In the event of an IRS audit, the IRS may view the remedial action as a “good faith” effort on the part of the IRA department to meet compliance requirements. Following are some suggestions for remedial action for the most common compliance concerns. The remedial actions are merely suggestions and do not guarantee protection against IRS penalties. Financial organizations should consult with competent legal advisors.

164 • Performing an Audit

No Opening DocumentsTechnically, if an individual intending to open an IRA has not received opening documents (or no proof exists that the documents have been received), then no IRA exists. No IRA professional wants to inform an individual who has been making IRA contributions for years that there is no IRA and that corrections may have to be made to tax forms submitted in previous years.

The financial organization may ask the IRA owner if she has the signed, original documents. If so, the financial organization can make copies of the documents and place the copies in the file. If not, the financial organization may wish to have the individual sign new IRA documents (possibly as an amendment) to make the IRA legitimate from this point on. If there are any extenuating circumstances that may account for the loss of the documents (e.g., a merger or acquisition), the financial organization may consider placing a note in the file detailing the circumstances.

Missing AmendmentsOften, the most common compliance problem in IRA departments is missing amendments. The best that a financial organization can do is to get “catch-all” amendments out to all affected IRA owners. The catch-all amendment is an up-to-date plan agreement and disclosure statement. Although a catch-all amendment shows a good-faith compliance effort on behalf of the financial organization, it does not guarantee that the IRS will waive penalties for past failures.

Missing Contribution or Withdrawal FormsBecause transaction forms themselves are not an IRS compliance requirement, the financial organization generally does not have to make an extraordinary effort to reproduce these forms. This may be a problem when IRA owner elections are required, such as the election to treat a contribution as a prior-year contribution or the required irrevocable elections for rollovers, conversions, and recharacterizations. This also would be a problem if there is no withholding election on file and the financial organization did not apply the proper withholding (generally 10 percent for IR accounts and withholding based on wages for IR annuities). If a question of reporting accuracy arises, the financial organization may have to resurrect daily transaction reports to produce the proof of the contribution or withdrawal.

Incorrect IRS Reporting FormsThe financial organization may find that some IRS reporting forms do not accurately reflect the IRA transaction that took place. According to the Instructions for Forms 1099-R and 5498, financial organizations should make corrections to reporting forms as soon as possible following the discovery of the error. IRS Publication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G, states that filers generally should submit corrections for returns filed within the last three calendar years.

Missing Evidence of Withholding Notice and ElectionThere is no remedial action available if withholding notices and elections are absent. The financial organization must make sure that current operations include correct withholding procedures.

Often there is no guaranteed remedial action for a compliance problem. The best way to prevent compliance concerns is to be aware of existing rules and regulations and to make sure that current operations are consistent with those regulations.

Miscellaneous Compliance Concerns • 165

Chapter 6

Miscellaneous Compliance ConcernsDesigning an Efficient IRA Department

Procedure Manual

IRA File Maintenance

Record Retention

Importance of Training IRA Personnel

Required Minimum Distributions

IRA Beneficiary Distribution Procedures

Traditional IRA Beneficiary Options

Roth IRA Beneficiary Options

Designing an Efficient IRA Department

Designing the optimum IRA department is no easy task. No two organizations are laid out identically —what works for one organization may not be ideal for another. Some general guidelines, however, can be followed and redesigned to fit an organization when designing an efficient IRA program.

To ensure a successful IRA program, experience has shown that a centralized IRA department backed by a management commitment to expand the retirement plan product is important. Organization of the IRA unit depends on the number of personnel in the department as well as on whether multiple locations are involved. All personnel handling IRAs should have a working knowledge of the rules.

Responsibilities of the manager often include the following.

Marketing – The manager, working within the guidelines set by top management, determines the marketing budget.

Compliance – The manager stays abreast of compliance issues and is a key figure in the coordination and communication process. Often she is the individual who communicates required changes to the organization’s data processor. Much of this information comes from the organization’s legal area, compliance officers, and other outside technical advisors.

Documentation – Retirement plan products and operations require numerous documents and forms. The manager purchases or designs both required forms and ancillary forms for the IRA program.

166 • Miscellaneous Compliance Concerns

Education – Because of the ever-changing nature of the IRA industry, ongoing training programs are an essential part of a well-run IRA program. The manager usually oversees the training coordination, whether internally based or from an outside source, and ensures that all personnel handling IRAs receive training at least annually.

Administration – Administrative duties vary from one organization to another depending upon the level of services provided, internal reporting capabilities, and extent of centralized operations. Effective administration usually includes government and IRA owner reporting, management reports, ancillary services, and record retention.

Government and IRA Owner ReportingMost organizations have or are gradually moving toward attaining highly developed data processing capabilities that are designed to meet IRA compliance and reporting requirements. These may be coordinated on a team or committee level by the retirement products department. Periodic meetings to discuss coding changes, layout, timing, report formats, and mailings may prove helpful.

Management ReportsSuccessful management of an IRA program incorporates regular reports consisting of essential management information. Although not all organizations may access all types of information, the following represents the range of management information that may prove useful when analyzing the IRA program.

IRA Analysis – Demographic analysis—region, state, incomes, etc.

Deposit Analysis – Comparison of deposits by age of depositor, month of greatest/least activity, average amount, and type of deposit

Contribution Report – IRA owners’ contributions monitored year-to-date

Investment Analysis – Types of investments IRA owners are selecting

Investment Maturity – For IRAs funded with certificates of deposit, an analysis by month of when the investments will mature

Distribution Analysis – Comparison of distributions by age of IRA owner, month of greatest activity, average amount, and reason codes

Distribution Forecast – Analysis of IRA owners by name, and who will soon reach age 59½ and 70½

NotificationsTypical administrative functions commonly found in comprehensive IRA programs include certain notifications. These may include, for example, notifications to IRA owners when documents require amending, of excess contributions, when beneficiary designations should be updated, and when distributions are required.

Record RetentionFinancial organizations usually use one of the two most common methods of record retention. (See “Record Retention” later in this chapter for more detailed information.)

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Method One: Central File SystemUnder this method, a central location handles the details of IRA administration and recordkeeping. Branch offices initiate IRA opening procedures and various transactions, but all original documentation is forwarded to the central office for retention and recordkeeping. The advantages of this method include less training required of branch personnel, paperwork reduction, and verification that documentation is properly completed.

Method Two: Branch Record RetentionUnder this method, IRA transactions are completed from start to finish and records are stored at the branch. Organizations using this method often reproduce all documentation electronically for storage in a central location.

Procedure Manual

In-house procedure manuals are essential compliance aids. A man ual generally will describe IRA procedures according to the IRS rules and regulations. In addition, a procedure manual will detail specific operations unique to the financial organization, including the forms used to record transactions. This comprehensive manual should serve both as a reference for answering basic IRA questions and as a guide for consistency in IRA operations.

Financial organizations may assemble procedure manuals using a basic reference service purchased from a retirement services supplier as the basis for the section on IRS requirements. Another alternative is to use the IRS Publications 590-A, Contributions to Individual Retirement Arrangements (IRAs), and 590-B, Distributions from Individual Retirement Arrangements (IRAs), as the basis for the IRS requirements. Alternatively, the financial organization also may draft its own section on IRA rules and regulations.

Address Specific ProceduresFollowing an initial section on basic IRA information, the financial organization may include a section on the specific procedures used by the financial organization to conduct IRA transactions. This section should list the forms that are used as well as how the transaction is performed.

Forms CatalogThe third section of the procedure manual may contain samples of all of the forms the IRA department uses in processing IRA transactions. The sample forms should be completed so IRA administrators may turn to the form and determine the proper procedure for completing the form. Include any forms that the financial organization uses that may be unique to that organization. For instance, some financial organizations require signature cards, although they are not specifically an IRS requirement.

Financial Organization ProceduresThe final section of the procedure manual may be comprised of the financial organization’s reporting and data processing procedures. Copies of current, completed reporting form samples, along with descriptions of the organization’s most common reporting errors, could be included. The procedures a financial organization follows to transfer the reporting information from the IRA owner’s forms to the IRS reporting forms should be detailed. This section should incorporate the financial organization’s own internal coding for entering information into its data system. Guidelines for paper reporting would also be helpful.

168 • Miscellaneous Compliance Concerns

Example of Procedure Manual Outline

I. Basic IRA Information

A. History

B. Eligibility

C. Establishment

D. Contributions

E. Distributions

F. Reporting

G. Compliance

II. Financial Organization’s Specific Documentation – Traditional IRAs

A. Plan Agreement and Application

B. Disclosure/Financial Disclosure Statement

C. Beneficiary Designation

D. Contribution Information

E. Contribution Eligibility

F. Certification for Late Rollover (post-60 day)

G. Transfer Request

H. Direct Rollover Request

I. IRA Recharacterization Request

J. Withdrawal Statement

K. Withholding Election

L. Change of Account Information

M. Specific Investment Forms (e.g., CDs, money markets, passbooks, etc.)

NOTE: The financial organization may include a separate list for Roth IRA forms.

III. Financial Organization’s IRA Procedures – Traditional IRA

A. Establishing an IRA

B. Accepting IRA Contributions

1. Regular Contributions

2. Direct Rollover

3. Indirect (60 day) Rollover

4. Transfer

5. SEP

6. Recharacterization

NOTE: The financial organization may include a separate list for Roth IRA procedures.

Miscellaneous Compliance Concerns • 169

C. Making IRA Distributions

1. Types of Distributions

2. Withholding

3. Required Minimum Distributions

4. Death Distributions/Beneficiary Options

5. Distribution Because of Divorce

6. Rollover Distributions

7. Transfer Distributions

8. Recharacterizations

9. Conversions

NOTE: The financial organization may include a separate list for Roth IRA procedures.

IV. Financial Organization’s Reporting and Data Processing

A. Current Electronic or Paper Reporting Forms and Instructions

B. Internal Data Entry Procedures

C. Cross-Checking Reporting

D. Special Electronic or Paper Reporting Concerns

E. Common Reporting Errors

IRA File Maintenance

Proper IRA file maintenance will prove valuable when conducting an internal IRA audit and when the IRS performs an audit. The contents of IRA files differ between organizations, depending upon how the financial organization stores information and what reporting methods are used. Ideally, an individual should be able to open an IRA file and trace the complete history of the IRA. Each IRA transaction should have paperwork documenting how it was carried out. Records may be stored electronically rather than running a paper copy for each file. Financial organizations using this method should make sure that the reporting is readily accessible to check if necessary.

The ideal IRA file should contain most of the IRA material listed here. Simply follow the outlined procedures and gather the recommended information. Doing so will help to ensure that your IRA files are maintained in compliance with IRS guidelines.

IRA File ContentsThe following information should be retained in each IRA owner’s file.

• An executed IRA application and plan agreement (Form 5305, 5305-A, 5305-R, 5305-RA, 5305-RB or a prototype) and a copy of the disclosure statement or an acknowledgment by the IRA owner that he received a plan agreement and disclosure statement (including the financial disclosure)

• Information that may be required to satisfy the financial organization’s Customer Identification Program (CIP)

170 • Miscellaneous Compliance Concerns

• Amendments to the plan agreement and disclosure statement for law or regulatory changes occurring after the IRA was opened (or a master file containing all amendments with the names and addresses of IRA owners that were sent such amendments)

• Beneficiary designation and beneficiary designation changes

• Contribution information that consists of a contribution form signed by the IRA owner, showing the date and amount of the contribution, the contribution type, and the year for which the contribution is made

• Investments selection and information

• Distribution information, including a withdrawal statement or request (authorization from the IRA owner or beneficiary to take a distribution in the amount and for the reason given), and a withholding notice and election (Form W-4P or a substitute)

• Required minimum distribution information, including the calculation method, reporting information, and timing of distributions

• Any documentation or correspondence relating to a transfer, rollover, recharacterization, and conversion

• Any documentation or correspondence relating to establishing a series of substantially equal periodic payments

• Death distributions should be accompanied by the following.

– A certified copy of the death certificate

– An executed withdrawal statement or other instructions from the estate representative or beneficiary

– The distribution method (e.g., life expectancy payments, five-year rule)

– A certified copy of Letters Testamentary or Letters of Administration (from the issuing County or Probate Court) if no beneficiary is designated (if applicable)

– An affidavit of a successor of the decedent (if applicable, when the value of the entire probate estate is a small amount and the estate will not be probated).

• Divorce claims also should be documented by retaining the following.

– A copy of the divorce decree (or the portion thereof) granting all or a portion of the IRA owner’s IRA to her ex-spouse

– A withdrawal statement or request executed by the IRA owner in accordance with the terms of the divorce decree

IRA Master FileA master file is a file containing all pertinent information relating to a specific operation of the IRA program. The information in this file generally is what an IRS examiner will request when conducting an audit on that particular IRA issue. Some common master file categories are listed below.

Miscellaneous Compliance Concerns • 171

Current Forms Files

Opening documents• Plan agreements

• Disclosure statements

• Beneficiary forms

• Mailing list of recipients

• Dates when various document versions were used

Transaction forms• Contribution forms

• Withdrawal forms

• Transfer forms

• Rollover forms

• Recharacterization forms

• Conversion forms

• RMD forms

Amendment File• Amendments (maintain a separate file for each amendment)

• Cover letters

• Mailing list of recipients

• Dates that documents were sent

Withholding File• Withholding elections

• Mailing list of recipients

• Dates that documents were sent

General Correspondence File• Correspondence from financial organization to IRA owners

• Mailing list of recipients

• Dates that documents were sent

• CIP program

Record Retention

IRA administrators constantly generate operational and reporting forms documenting IRA transactions. IRA owners also initiate forms when opening, maintaining, or closing IRAs. Paper, microfiche, discs, files, and boxes of data accumulate. IRA administrators eventually question what records need to be kept and for how long.

Unfortunately, no one governmental resource contains the record retention requirements for IRAs. The retention of various types of records is governed by different sources.

172 • Miscellaneous Compliance Concerns

Evolution of Record RetentionThe requirements for retaining financial organization records, including IRA records, have evolved over the years through various laws, such as the Federal Deposit Insurance Act, the USA PATRIOT Act (Client Identification Program), and the Bank Secrecy Act. Federal agencies that govern financial organizations, such as the Office of Comptroller of Currency, Federal Deposit Insurance Corporation, National Credit Union Administration, and IRS, also require different record retention measures. States also have laws affecting financial records and these laws may be more stringent than the federal requirements.

Documentation to RetainGenerally, financial organizations need to keep account identification information and other documentation necessary to reconstruct any financial transaction. Each financial organization should retain either the original or a copy of the following records.

• IRA plan agreements, disclosure statements, financial disclosures (or an IRA owner acknowledgment that these documents were received)

• Documents granting signature authority for each deposit or share account (IRA opening documents, contribution forms)

• Statements, ledger cards, or other records on each deposit or share account, showing each transaction with respect to that account

• Any withdrawal forms along with checks, clean drafts, or money orders drawn on the financial organization or issued and payable by it, with exceptions

• A record containing the name, address, and taxpayer identification number of the purchaser of each certificate of deposit or person presenting a certificate of deposit for payment, as well as a description of the instrument, date of transaction, and method of payment

• Contribution forms, deposit slips, or credit tickets (or the equivalent for direct deposit transactions)

In addition, laws and regulations may require retention of other records associated with IRA transactions, including records of IRS information returns.

Maintaining Records ElectronicallyFinancial organizations may retain IRA records in various forms: hard copies, photocopies, computer printouts, microfilm, microfiche, imaging, or other types of electronic media storage that can be readily reproduced into hard copies.

Revenue Procedure (Rev. Proc.) 97-22 provided guidance on how financial organizations could maintain books and records (including IRA documents) on electronic storage systems that either (1) images their hardcopy, or (2) transfers their computerized books and records to an electronic storage media, such as optical disk. In addition, Rev. Proc. 98-25 describes requirements that must be met when taxpayer records are maintained within an automatic data processing (ADP) system. The federal guidelines under Rev. Proc. 97-22 allow for the destruction of the original hardcopy records but only after testing of the system is established and conducted, and procedures are in place that ensure continued compliance with all the provisions of Rev. Proc. 97-22. Financial organizations that store records electronically should obtain tax or legal advice to determine whether they must retain hard copy documents.

Miscellaneous Compliance Concerns • 173

The Electronic Signatures in Global and National Commerce Act (E-SIGN), signed into law in June 2000, generally grants legal recognition to electronic storage methods. Generally, if a statute or regulation requires a contract or other record to be provided, made available, or retained in its original form, that statute or regulation is satisfied by an electronic record that satisfies the general E-SIGN consent requirements. The information being stored electronically must accurately reflect the information contained in the original contract or record, and the records being stored must remain accessible to all persons who are entitled to access.

Financial organizations looking to implement a policy for electronic storage of IRA documents should keep in mind the following.

• A state or federal statute or regulation may require IRA contracts and forms to be provided, available, or retained in their original form. Electronic storage is still an option in this case; however, the general E-SIGN consent requirements should be followed.

• A state or federal regulatory agency that is responsible for rulemaking under any statute may interpret the E-SIGN general provisions through either the issuance of regulations or other guidance.

• A state statute or regulation that constitutes an enactment of the Uniform Electronic Transactions Act, which was issued by the National Conference of Commissioners on Uniform State Laws in 1999 and adopted by many states, is not preempted by E-SIGN.

• E-SIGN provisions are specifically not applicable to a contract or other record to the extent it is governed by state statutes governing wills, testamentary trusts, family law matters and certain Uniform Commercial Code provisions. Thus, it may be possible for an item like a beneficiary designation to fall outside the scope of E-SIGN.

Length of Time to Keep RecordsAs noted earlier, the requirements for retaining financial organization records, including IRA records, have evolved over the years through various laws and regulations. Federal laws and agencies that govern financial organizations provide varying requirements and recommendations for retaining financial records. Although the sources differ on requirements, financial organizations generally must retain account identification information and other records necessary to reconstruct any financial transaction for at least five years from the date the account is closed. States also have laws regarding financial record retention, and these laws may be more stringent than the federal requirements. Therefore, financial organizations should check with their regulatory agencies, legal counsel, and state laws to verify the length of time that they must retain various IRA records.

Conservatively, financial organizations should retain their records for seven or more years after the last activity has occurred (e.g., IRA is closed, last report is filed), but financial organizations should consult with their legal counsel if they choose to retain records for a different period.

IRS Information ReturnsIn IRS Publication 1220, Specifications for Electronic Filing of Forms 1097, 1098, 1099, 3921, 3922, 5498, and W-2G, the IRS states that payers should retain copies of information returns or should have the ability to reconstruct the data for at least three years from the reporting due date. Depending on a financial organization’s policies and recordkeeping systems, copies of Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and Forms 5498, IRA Contribution Information, for example, might be necessary to reconstruct IRA transactions. Conservatively, financial organizations may choose to keep these records for as long as they keep all other IRA records.

174 • Miscellaneous Compliance Concerns

PenaltiesThe penalties for failure to properly retain records fall into two categories: civil and criminal. If any domestic financial organization or any partner, director, officer, or employee thereof willfully violates any of these recordkeeping requirements, the Secretary may assess a civil penalty. If the violation is deemed to be a result of negligence (rather than a willful violation), a civil penalty may be assessed. Any person willfully violating these recordkeeping requirements may be subject to criminal prosecution, and if convicted may be imprisoned for a year or fined.

Importance of Training IRA Personnel

Educating IRA personnel is not a one-time proposition. Because Congress and the IRS are constantly changing the rules and regulations governing IRAs, personnel must be constantly updated to make sure their programs remain in compliance.

Education may be presented in many different forms. Seminars and webinars offer up-to-date information on IRA maintenance and on how to put IRA changes into operation. Monthly IRA publications keep a financial organization immediately apprised of any IRA news. In-house operations manuals and reference manuals are essential for instant access to IRA answers. Manuals of this type must be constantly updated in response to IRA changes in forms, rules, or regulations. Yet, none of these IRA educational materials are of any use without a good foundation of basic IRA information.

Basic IRA training is appropriate for any financial organization personnel that come in contact with IRAs. Everyone recognizes the need to train new employees in the maintenance of IRAs. New employees need to know more than how to assist clients in completing forms. These employees must know the basic rules and regulations that govern IRAs so that they understand why they are performing certain actions and can discuss the general rules with IRA owners.

New employees are not the only personnel that need IRA training. Experienced IRA employees and managers also should periodically review the rules because the rules often change from actions taken by Congress or by the IRS. Many IRA personnel do not work solely with IRAs. For these employees, IRAs become more of a reality in March and April when most contributions are made and excess contributions are removed and then again in December when certain IRA owners must take distributions. During the rest of the year, IRA activity is sporadic and personnel are involved in other financial organization business. By the time the next IRA season begins, most personnel need a review of IRA basic requirements and an update on any IRS changes.

Support personnel also may benefit from IRA training. Employees in marketing, data processing, loans, customer service, and compliance are in positions to support IRA personnel or to cross-sell IRA products. These employees need IRA training to understand the product that they are representing even though they may not have a direct responsibility for maintaining the IRAs. Employees in other departments may recommend IRAs to clients, but if personnel do not understand the advantages or the limitations of the product, they are not in a position to know who can benefit from IRAs.

All of these employees need training in basic IRAs but more than that, they need at least an annual review of IRA operations and an update on new infor mation to maintain compliance.

Miscellaneous Compliance Concerns • 175

Required Minimum Distributions

In addition to understanding the mechanics of making IRA distributions and the various distribution codes for reporting on Form 1099-R, financial organizations must understand their responsibilities regarding Traditional IRA required minimum distributions (RMDs), among which includes calculating RMD amounts for clients and reporting to the IRS on Form 5498 which IRA owners are required to take RMDs. (See Chapter 4, IRA Reporting, for RMD statement requirements.)

Congress and the IRS have made changes to distribution requirements over the years. In April 2002, the IRS issued final RMD regulations under Treas. Regs. 1.401(a)(9) and 1.408-8. The final RMD regulations were released in Treasury Decision (TD) 8987. Use of the final RMD regulations is mandatory for determining RMDs for calendar years beginning on or after January 1, 2003. Final RMD regulations for annuities were released in TD 9130 in 2004. And as recently as 2014, the IRS published final regulations in TD 9673, which introduced the concept of qualifying longevity annuity contracts for IRAs and retirement plans and added further changes to RMDs and RMD calculations.

Required Beginning DateTraditional IRA owners must begin taking RMDs from their IRAs at least annually beginning the year they reach age 70½. The regulations that provide the bulk of the guidance on RMDs from IRAs and qualified retirement plans are Treas. Regs. 1.401(a)(9) and 1.408-8.

NOTE: RMDs do not apply to Roth IRA owners, but distributions generally must commence after a Roth IRA owner’s death.

The distribution regulations require that IRA owners begin taking RMDs from their IRAs at least annually by their required beginning date (RBD). An IRA owner’s RBD is April 1 of the year following the year in which the individual reaches age 70½. For example, if an individual turns age 70 on March 1, 2018, he will turn 70½ in 2018 and his RBD will be April 1, 2019. On the other hand, if an individual turns age 70 on July 1, 2018, he will not turn age 70½ until 2019 and his RBD will be April 1, 2020.

Failure to Take an RMDThe IRA owner is required to take IRA distributions when she reaches age 70½. Failure to withdraw the proper amount subjects the IRA owner to a 50 percent excess accumulation penalty tax.

RMD Calculation ResponsibilityFinancial organizations are required to provide RMD statements to IRA owners, to calculate RMDs, and to report to the IRS if an IRA owner is required to take an RMD (Treas. Reg. 1.408-8, Q&A 10). (See “Required Minimum Distribution Statement” in Chapter 4, IRA Reporting, for more information.)

Default ProvisionsAs mentioned earlier, IRA owners must take their first RMD by their required beginning date (April 1 following the year in which they turn age 70½). If an IRA owner does not make any arrangements regarding RMDs with the IRA administrator, the language in the IRA plan agreement generally will determine how (or if) the financial organization will make a distribution. IRA administrators should check the language of their IRA plan agreements to determine the applicable default provision if the IRA owner fails to make arrangements for taking RMDs.

176 • Miscellaneous Compliance Concerns

Satisfying an RMDFor RMDs, the IRA owner must choose a method to begin distributing the IRA. IRA owners have the option of

• taking an RMD annually based on a distribution period defined in the Uniform Lifetime Table, or if the spouse is the sole beneficiary and is more than 10 years younger, taking an RMD annually based on the joint life expectancy of the IRA owner and spouse, or

• taking any amount that is more than the IRA owner’s RMD, keeping in mind that distributions of at least the RMD must be taken every year.

Article VIII of the Traditional IRA plan agreement may include a default provision for IRA owners who have not made an election of how to take their RMDs.

Calculating RMDsGenerally, the RMD is calculated by dividing the account balance by the applicable distribution period (Treas. Reg. 1.401(a)(9)-5, Q&A 1, and Treas. Reg. 1.408-8, Q&A 6).

Account BalanceThe account balance is the IRA balance on December 31 of the year before the year for which a distribution is required. Such balance is adjusted by including the following.

• Add to the receiving IRA any outstanding rollovers, which are distributions taken within the last 60 days of a year and rolled over after the first of the following year.

• Add to the receiving IRA any outstanding transfers, which are transfers not received in the same calendar year as they were sent from the transferor IRA.

• If a conversion or retirement plan-to-Roth IRA rollover is recharacterized along with the net income attributable (NIA) to a Traditional IRA, add to the receiving IRA the amount of the recharacterized contribution plus NIA to the December 31 balance for the year in which the conversion or retirement plan rollover occurred.

• Reduce the account balance by the value of any qualifying longevity annuity contract (QLAC), if applicable (see “Qualifying Longevity Annuity Contracts” later).

Contributions and distributions made after December 31 of a calendar year generally are disregarded when calculating the RMD for the following year. For example, if the first year’s (age 70½) RMD is taken between January 1 and April 1 of the following year (thus, in the second distribution year), the first year’s RMD is not subtracted from the December 31 balance when determining the RMD for the second distribution year. Also, prior-year IRA contributions made for an IRA owner’s age 69½ year (the year before the year for which the first RMD is required) should not be added back into the December 31 account balance.

Distribution PeriodDuring an IRA owner’s lifetime, the distribution period used to calculate RMDs for nearly all individuals (with one exception explained next) is found in the Uniform Lifetime Table in Treas. Reg. 1.401(a)(9)-9, Q&A 2. To determine the distribution period for purposes of calculating the RMD, refer to the Uniform Lifetime Table using the age that the IRA owner becomes in the year for which the distribution is required.

Miscellaneous Compliance Concerns • 177

UNIFORM LIFETIME TABLE (For Use by IRA Owners)

Age Distribution Period Age Distribution Period

70 27.4 71 26.5 72 25.6 73 24.7 74 23.8

93 9.6 94 9.1 95 8.6 96 8.1 97 7.6

75 22.9 76 22.0 77 21.2 78 20.3 79 19.5

98 7.1 99 6.7 100 6.3 101 5.9 102 5.5

80 18.7 81 17.9 82 17.1 83 16.3 84 15.5

103 5.2 104 4.9 105 4.5 106 4.2 107 3.9

85 14.8 86 14.1 87 13.4 88 12.7 89 12.0

108 3.7 109 3.4 110 3.1 111 2.9 112 2.6

90 11.4 91 10.8 92 10.2

113 2.4 114 2.1 115 and over 1.9

EXAMPLE: Josh, a bachelor, turned 71 in 2018, which also is the calendar year in which he turns 70½. Quick Silver Bank, the custodian of Josh’s IRA, calculates Josh’s RMD for 2018 by dividing his IRA’s December 31, 2017, balance of $145,000 by the life expectancy divisor from the Uniform Lifetime Table for a 71-year-old, which is 26.5. Josh’s RMD for 2018 equals $145,000/26.5 = $5,471.70.

178 • Miscellaneous Compliance Concerns

Exception to Uniform Lifetime Table: Spouse Beneficiary More Than 10 Years YoungerUnder the final RMD regulations, an exception to applying the Uniform Lifetime Table exists if a spouse beneficiary is more than 10 years younger than the IRA owner and is the sole beneficiary. In this case, the IRA owner must use the longer distribution period as determined by the actual joint life expectancy of the two individuals rather than the life expectancy divisor from the Uniform Lifetime Table (Treas. Reg. 1.401(a)(9)-5, Q&A 4(b)(1)). The joint life expectancy is found in the IRS’ Joint Life Expectancy Table. The spouse is considered the sole designated beneficiary if he is the sole beneficiary at all times during the distribution year. If there is a change in marital status during the year because of death or divorce, the change in beneficiary for determining the distribution period takes effect in the year following the year of death or divorce.

NOTE: The life expectancy tables—Uniform Lifetime, Single Life Expectancy, and Joint Life Expectancy Tables—may be found in IRS Publication 590-B.

Excerpt From Joint Life Expectancy Table

TABLE II (Continued)(Joint Life and Last Survivor Expectancy) (For Use by Owners with Spouses More Than 10 Years Younger)

AGES 50 51 52 53 54 55 56 57 58 59 AGES 50 51 52 53 54 55 56 57 58 59

50 40.4 40.0 39.5 39.1 38.7 38.3 38.0 37.6 37.3 37.1 51 40.0 39.5 39.0 38.5 38.1 37.7 37.4 37.0 36.7 36.4 52 39.5 39.0 38.5 38.0 37.6 37.2 36.8 36.4 36.0 35.7 53 39.1 38.5 38.0 37.5 37.1 36.6 36.2 35.8 35.4 35.1 54 38.7 38.1 37.6 37.1 36.6 36.1 35.7 35.2 34.8 34.5

83 34.4 33.5 32.6 31.7 30.8 29.9 29.1 28.2 27.4 26.5 84 34.3 33.4 32.5 31.7 30.8 29.9 29.0 28.2 27.3 26.5 85 34.3 33.4 32.5 31.6 30.7 29.9 29.0 28.1 27.3 26.4 86 34.3 33.4 32.5 31.6 30.7 29.8 29.0 28.1 27.2 26.4 87 34.3 33.4 32.5 31.6 30.7 29.8 28.9 28.1 27.2 26.4

55 38.3 37.7 37.2 36.6 36.1 35.6 35.1 34.7 34.3 33.9 56 38.0 37.4 36.8 36.2 35.7 35.1 34.7 34.2 33.7 33.3 57 37.6 37.0 36.4 35.8 35.2 34.7 34.2 33.7 33.2 32.8 58 37.3 36.7 36.0 35.4 34.8 34.3 33.7 33.2 32.8 32.3 59 37.1 36.4 35.7 35.1 34.5 33.9 33.3 32.8 32.3 31.8

88 34.3 33.4 32.5 31.6 30.7 29.8 28.9 28.0 27.2 26.3 89 34.3 33.3 32.4 31.5 30.7 29.8 28.9 28.0 27.2 26.3 90 34.2 33.3 32.4 31.5 30.6 29.8 28.9 28.0 27.1 26.3 91 34.2 33.3 32.4 31.5 30.6 29.7 28.9 28.0 27.1 26.3 92 34.2 33.3 32.4 31.5 30.6 29.7 28.8 28.0 27.1 26.2

60 36.8 36.1 35.4 34.8 34.1 33.5 32.9 32.4 31.9 31.3 61 36.6 35.8 35.1 34.5 33.8 33.2 32.6 32.0 31.4 30.9 62 36.3 35.6 34.9 34.2 33.5 32.9 32.2 31.6 31.1 30.5 63 36.1 35.4 34.6 33.9 33.2 32.6 31.9 31.3 30.7 30.1 64 35.9 35.2 34.4 33.7 33.0 32.3 31.6 31.0 30.4 29.8

93 34.2 33.3 32.4 31.5 30.6 29.7 28.8 28.0 27.1 26.2 94 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.1 26.2 95 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.1 26.2 96 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.0 26.2 97 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.0 26.2

65 35.8 35.0 34.2 33.5 32.7 32.0 31.4 30.7 30.0 29.4 66 35.6 34.8 34.0 33.3 32.5 31.8 31.1 30.4 29.8 29.1 67 35.5 34.7 33.9 33.1 32.3 31.6 30.9 30.2 29.5 28.8 68 35.3 34.5 33.7 32.9 32.1 31.4 30.7 29.9 29.2 28.6 69 35.2 34.4 33.6 32.8 32.0 31.2 30.5 29.7 29.0 28.3

98 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.0 26.2 99 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.0 26.2 100 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.0 26.1 101 34.2 33.3 32.4 31.5 30.6 29.7 28.8 27.9 27.0 26.1 102 34.2 33.3 32.4 31.4 30.5 29.7 28.8 27.9 27.0 26.1

70 35.1 34.3 33.4 32.6 31.8 31.1 30.3 29.5 28.8 28.1 71 35.0 34.2 33.3 32.5 31.7 30.9 30.1 29.4 28.6 27.9 72 34.9 34.1 33.2 32.4 31.6 30.8 30.0 29.2 28.4 27.7 73 34.8 34.0 33.1 32.3 31.5 30.6 29.8 29.1 28.3 27.5 74 34.8 33.9 33.0 32.2 31.4 30.5 29.7 28.9 28.1 27.4

103 34.2 33.3 32.4 31.4 30.5 29.7 28.8 27.9 27.0 26.1 104 34.2 33.3 32.4 31.4 30.5 29.6 28.8 27.9 27.0 26.1 105 34.2 33.3 32.3 31.4 30.5 29.6 28.8 27.9 27.0 26.1 106 34.2 33.3 32.3 31.4 30.5 29.6 28.8 27.9 27.0 26.1 107 34.2 33.3 32.3 31.4 30.5 29.6 28.8 27.9 27.0 26.1

75 34.7 33.8 33.0 32.1 31.3 30.4 29.6 28.8 28.0 27.2 76 34.6 33.8 32.9 32.0 31.2 30.3 29.5 28.7 27.9 27.1 77 34.6 33.7 32.8 32.0 31.1 30.3 29.4 28.6 27.8 27.0 78 34.5 33.6 32.8 31.9 31.0 30.2 29.3 28.5 27.7 26.9 79 34.5 33.6 32.7 31.8 31.0 30.1 29.3 28.4 27.6 26.8

108 34.2 33.3 32.3 31.4 30.5 29.6 28.8 27.9 27.0 26.1 109 34.2 33.3 32.3 31.4 30.5 29.6 28.7 27.9 27.0 26.1 110 34.2 33.3 32.3 31.4 30.5 29.6 28.7 27.9 27.0 26.1 111 34.2 33.3 32.3 31.4 30.5 29.6 28.7 27.9 27.0 26.1 112 34.2 33.3 32.3 31.4 30.5 29.6 28.7 27.9 27.0 26.1

80 34.5 33.6 32.7 31.8 30.9 30.1 29.2 28.4 27.5 26.7 81 34.4 33.5 32.6 31.8 30.9 30.0 29.2 28.3 27.5 26.6 82 34.4 33.5 32.6 31.7 30.8 30.0 29.1 28.3 27.4 26.6

113 34.2 33.3 32.3 31.4 30.5 29.6 28.7 27.9 27.0 26.1 114 34.2 33.3 32.3 31.4 30.5 29.6 28.7 27.9 27.0 26.1 115+ 34.2 33.3 32.3 31.4 30.5 29.6 28.7 27.9 27.0 26.1

Miscellaneous Compliance Concerns • 179

TABLE II (Continued)(Joint Life and Last Survivor Expectancy) (For Use by Owners with Spouses More Than 10 Years Younger)

AGES 60 61 62 63 64 65 66 67 68 69 AGES 60 61 62 63 64 65 66 67 68 69

60 30.9 30.4 30.0 29.6 29.2 28.8 28.5 28.2 27.9 27.6 61 30.4 29.9 29.5 29.0 28.6 28.3 27.9 27.6 27.3 27.0 62 30.0 29.5 29.0 28.5 28.1 27.7 27.3 27.0 26.7 26.4 63 29.6 29.0 28.5 28.1 27.6 27.2 26.8 26.4 26.1 25.7 64 29.2 28.6 28.1 27.6 27.1 26.7 26.3 25.9 25.5 25.2

88 25.5 24.6 23.8 23.0 22.2 21.4 20.6 19.8 19.1 18.3 89 25.4 24.6 23.8 22.9 22.1 21.3 20.5 19.8 19.0 18.3 90 25.4 24.6 23.7 22.9 22.1 21.3 20.5 19.7 19.0 18.2 91 25.4 24.5 23.7 22.9 22.1 21.3 20.5 19.7 18.9 18.2 92 25.4 24.5 23.7 22.9 22.0 21.2 20.4 19.6 18.9 18.1

65 28.8 28.3 27.7 27.2 26.7 26.2 25.8 25.4 25.0 24.6 66 28.5 27.9 27.3 26.8 26.3 25.8 25.3 24.9 24.5 24.1 67 28.2 27.6 27.0 26.4 25.9 25.4 24.9 24.4 24.0 23.6 68 27.9 27.3 26.7 26.1 25.5 25.0 24.5 24.0 23.5 23.1 69 27.6 27.0 26.4 25.7 25.2 24.6 24.1 23.6 23.1 22.6

93 25.4 24.5 23.7 22.8 22.0 21.2 20.4 19.6 18.8 18.1 94 25.3 24.5 23.6 22.8 22.0 21.2 20.4 19.6 18.8 18.0 95 25.3 24.5 23.6 22.8 22.0 21.1 20.3 19.6 18.8 18.0 96 25.3 24.5 23.6 22.8 21.9 21.1 20.3 19.5 18.8 18.0 97 25.3 24.5 23.6 22.8 21.9 21.1 20.3 19.5 18.7 18.0

70 27.4 26.7 26.1 25.4 24.8 24.3 23.7 23.2 22.7 22.2 71 27.2 26.5 25.8 25.2 24.5 23.9 23.4 22.8 22.3 21.8 72 27.0 26.3 25.6 24.9 24.3 23.7 23.1 22.5 22.0 21.4 73 26.8 26.1 25.4 24.7 24.0 23.4 22.8 22.2 21.6 21.1 74 26.6 25.9 25.2 24.5 23.8 23.1 22.5 21.9 21.3 20.8

98 25.3 24.4 23.6 22.8 21.9 21.1 20.3 19.5 18.7 17.9 99 25.3 24.4 23.6 22.7 21.9 21.1 20.3 19.5 18.7 17.9 100 25.3 24.4 23.6 22.7 21.9 21.1 20.3 19.5 18.7 17.9 101 25.3 24.4 23.6 22.7 21.9 21.1 20.2 19.4 18.7 17.9 102 25.3 24.4 23.6 22.7 21.9 21.1 20.2 19.4 18.6 17.9

75 26.5 25.7 25.0 24.3 23.6 22.9 22.3 21.6 21.0 20.5 76 26.3 25.6 24.8 24.1 23.4 22.7 22.0 21.4 20.8 20.2 77 26.2 25.4 24.7 23.9 23.2 22.5 21.8 21.2 20.6 19.9 78 26.1 25.3 24.6 23.8 23.1 22.4 21.7 21.0 20.3 19.7 79 26.0 25.2 24.4 23.7 22.9 22.2 21.5 20.8 20.1 19.5

103 25.3 24.4 23.6 22.7 21.9 21.0 20.2 19.4 18.6 17.9 104 25.3 24.4 23.5 22.7 21.9 21.0 20.2 19.4 18.6 17.8 105 25.3 24.4 23.5 22.7 21.9 21.0 20.2 19.4 18.6 17.8 106 25.3 24.4 23.5 22.7 21.9 21.0 20.2 19.4 18.6 17.8 107 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8

80 25.9 25.1 24.3 23.6 22.8 22.1 21.3 20.6 20.0 19.3 81 25.8 25.0 24.2 23.4 22.7 21.9 21.2 20.5 19.8 19.1 82 25.8 24.9 24.1 23.4 22.6 21.8 21.1 20.4 19.7 19.0 83 25.7 24.9 24.1 23.3 22.5 21.7 21.0 20.2 19.5 18.8 84 25.6 24.8 24.0 23.2 22.4 21.6 20.9 20.1 19.4 18.7

108 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8 109 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8 110 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8 111 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8 112 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8

85 25.6 24.8 23.9 23.1 22.3 21.6 20.8 20.1 19.3 18.6 86 25.5 24.7 23.9 23.1 22.3 21.5 20.7 20.0 19.2 18.5 87 25.5 24.7 23.8 23.0 22.2 21.4 20.7 19.9 19.2 18.4

113 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8 114 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8 115+ 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8

Aggregating RMDsTreas. Reg. 1.408-8, Q&A 9, provides an alternative method for satisfying RMDs for IRA owners who have multiple IRAs. Under the alternative method, an individual still must calculate RMDs separately for each IRA. The IRA owner may then total such amounts, and take the total amount from any one or more of the individual’s IRAs. Thus, the alternative method allows an individual to satisfy the RMD by taking from one IRA the amount required to satisfy the RMD for other IRAs. The alternative method is available to individuals who must receive RMDs either because they have attained age 70½ or because they are beneficiaries of IRA owners who have died. Only amounts in IRAs that an individual holds as the IRA owner may be aggregated. Amounts in multiple IRAs that an individual holds as a beneficiary of the same decedent generally may be aggregated, but such amounts may not be aggregated with amounts held in IRAs that the individual owns directly or as the beneficiary of another decedent.

IRA-to-IRA Transfers in a Distribution YearThe distribution regulations (Treas. Reg. 1.401(a)(9)) provide a special rule for trustee-to-trustee transfers between IRAs that coordinates the RMD rules and the rules that allow an IRA owner to aggregate RMDs and distribute such amount from any IRA that he owns. The final regulations state the following.

In light of the fact that the required minimum distribution with respect to the transferor IRA can be taken from any IRA, the transferor IRA will be able to transfer the entire balance and will not be required to retain the amount of the required minimum distribution for the year.

TABLE II (Continued)(Joint Life and Last Survivor Expectancy) (For Use by Owners with Spouses More Than 10 Years Younger)

AGES 60 61 62 63 64 65 66 67 68 69 AGES 60 61 62 63 64 65 66 67 68 69

60 30.9 30.4 30.0 29.6 29.2 28.8 28.5 28.2 27.9 27.6 61 30.4 29.9 29.5 29.0 28.6 28.3 27.9 27.6 27.3 27.0 62 30.0 29.5 29.0 28.5 28.1 27.7 27.3 27.0 26.7 26.4 63 29.6 29.0 28.5 28.1 27.6 27.2 26.8 26.4 26.1 25.7 64 29.2 28.6 28.1 27.6 27.1 26.7 26.3 25.9 25.5 25.2

88 25.5 24.6 23.8 23.0 22.2 21.4 20.6 19.8 19.1 18.3 89 25.4 24.6 23.8 22.9 22.1 21.3 20.5 19.8 19.0 18.3 90 25.4 24.6 23.7 22.9 22.1 21.3 20.5 19.7 19.0 18.2 91 25.4 24.5 23.7 22.9 22.1 21.3 20.5 19.7 18.9 18.2 92 25.4 24.5 23.7 22.9 22.0 21.2 20.4 19.6 18.9 18.1

65 28.8 28.3 27.7 27.2 26.7 26.2 25.8 25.4 25.0 24.6 66 28.5 27.9 27.3 26.8 26.3 25.8 25.3 24.9 24.5 24.1 67 28.2 27.6 27.0 26.4 25.9 25.4 24.9 24.4 24.0 23.6 68 27.9 27.3 26.7 26.1 25.5 25.0 24.5 24.0 23.5 23.1 69 27.6 27.0 26.4 25.7 25.2 24.6 24.1 23.6 23.1 22.6

93 25.4 24.5 23.7 22.8 22.0 21.2 20.4 19.6 18.8 18.1 94 25.3 24.5 23.6 22.8 22.0 21.2 20.4 19.6 18.8 18.0 95 25.3 24.5 23.6 22.8 22.0 21.1 20.3 19.6 18.8 18.0 96 25.3 24.5 23.6 22.8 21.9 21.1 20.3 19.5 18.8 18.0 97 25.3 24.5 23.6 22.8 21.9 21.1 20.3 19.5 18.7 18.0

70 27.4 26.7 26.1 25.4 24.8 24.3 23.7 23.2 22.7 22.2 71 27.2 26.5 25.8 25.2 24.5 23.9 23.4 22.8 22.3 21.8 72 27.0 26.3 25.6 24.9 24.3 23.7 23.1 22.5 22.0 21.4 73 26.8 26.1 25.4 24.7 24.0 23.4 22.8 22.2 21.6 21.1 74 26.6 25.9 25.2 24.5 23.8 23.1 22.5 21.9 21.3 20.8

98 25.3 24.4 23.6 22.8 21.9 21.1 20.3 19.5 18.7 17.9 99 25.3 24.4 23.6 22.7 21.9 21.1 20.3 19.5 18.7 17.9 100 25.3 24.4 23.6 22.7 21.9 21.1 20.3 19.5 18.7 17.9 101 25.3 24.4 23.6 22.7 21.9 21.1 20.2 19.4 18.7 17.9 102 25.3 24.4 23.6 22.7 21.9 21.1 20.2 19.4 18.6 17.9

75 26.5 25.7 25.0 24.3 23.6 22.9 22.3 21.6 21.0 20.5 76 26.3 25.6 24.8 24.1 23.4 22.7 22.0 21.4 20.8 20.2 77 26.2 25.4 24.7 23.9 23.2 22.5 21.8 21.2 20.6 19.9 78 26.1 25.3 24.6 23.8 23.1 22.4 21.7 21.0 20.3 19.7 79 26.0 25.2 24.4 23.7 22.9 22.2 21.5 20.8 20.1 19.5

103 25.3 24.4 23.6 22.7 21.9 21.0 20.2 19.4 18.6 17.9 104 25.3 24.4 23.5 22.7 21.9 21.0 20.2 19.4 18.6 17.8 105 25.3 24.4 23.5 22.7 21.9 21.0 20.2 19.4 18.6 17.8 106 25.3 24.4 23.5 22.7 21.9 21.0 20.2 19.4 18.6 17.8 107 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8

80 25.9 25.1 24.3 23.6 22.8 22.1 21.3 20.6 20.0 19.3 81 25.8 25.0 24.2 23.4 22.7 21.9 21.2 20.5 19.8 19.1 82 25.8 24.9 24.1 23.4 22.6 21.8 21.1 20.4 19.7 19.0 83 25.7 24.9 24.1 23.3 22.5 21.7 21.0 20.2 19.5 18.8 84 25.6 24.8 24.0 23.2 22.4 21.6 20.9 20.1 19.4 18.7

108 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8 109 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8 110 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8 111 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8 112 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8

85 25.6 24.8 23.9 23.1 22.3 21.6 20.8 20.1 19.3 18.6 86 25.5 24.7 23.9 23.1 22.3 21.5 20.7 20.0 19.2 18.5 87 25.5 24.7 23.8 23.0 22.2 21.4 20.7 19.9 19.2 18.4

113 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8 114 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8 115+ 25.2 24.4 23.5 22.7 21.8 21.0 20.2 19.4 18.6 17.8

180 • Miscellaneous Compliance Concerns

Treas. Reg. 1.408-8, Q&A 8, further specifies that a transfer is not treated as a distribution by the transferor (sending) IRA. Accordingly, any RMD that applies to the transferor IRA still must be satisfied, but may be distributed from another IRA owned by the IRA owner. If the transferee (receiving) IRA does not receive the transfer in the same calendar year as it was sent from the transferor IRA, then the transferee IRA’s December 31 balance for the preceding year must be adjusted to include the amount of the transfer.

IR Annuity PaymentsIR annuities are annuity contracts that are governed by the rules and regulations applicable to IRAs. While IR annuity owners may satisfy the RMD requirements using the same rules as IR account owners (i.e., by dividing the entire interest in the contract by the applicable life expectancy factor), they may optionally satisfy RMD requirements by taking contractually required annuity payments from the IR annuity contract.

IR Annuity BasicsThe rules for calculating IR annuity distributions to satisfy the RMD requirements are different from the rules for calculating RMDs for IR accounts. While the IR account rules generally require dividing the prior year-end balance by the life expectancy of the IR account owner, IR annuity payments are calculated by taking the value of an IR annuity and converting it to a stream of payments over the IRA owner’s life, or the joint lives of the IRA owner and his beneficiary. IR annuities that are intended to satisfy the RMD requirements also may be calculated over any fixed term, as long as the term does not exceed the single life expectancy of the IRA owner or the joint life expectancy of the IRA owner and his beneficiary. These IR annuity payments, generally, must be nonincreasing in value and must satisfy the Minimum Distribution Incidental Benefit rules (Treas. Reg. 1.401(a)(9)-6, Q&A 2) for beneficiary distributions that apply to IR annuity payments.

Effect of Final RegulationsFinal regulations under IRC Sec. 401(a)(9), released in Treasury Decision (TD) 9130, require financial organizations to generally include the present value of additional benefits provided under an IR annuity contract in an IR annuity owner’s entire interest for the purpose of calculating RMDs before contract annuitization. There is an exception to this inclusion rule for additional benefits that are reduced pro rata for any withdrawal, provided the actuarial present value of the additional benefits does not exceed 20 percent of the account balance. Each financial organization should analyze its contracts to determine which contracts are affected by this rule, and determine how to automate the process of adding the additional benefits into the contract value for RMD purposes.

A financial organization’s actuary generally will determine which additional benefits need to be added to an IR annuity owner’s benefit, as well as determine the value of these benefits. The final regulations provide some examples of how the value of additional benefit should be calculated.

Qualifying Longevity Annuity ContractsIn July 2014, the IRS published final regulations in Treasury Decision (TD) 9673, to address a type of annuity contract referred to as a “qualifying longevity annuity contract” (QLAC). A QLAC is an annuity contract that meets certain requirements and is purchased with assets in retirement plan accounts and IRAs (other than Roth IRAs). The annuity contract is designed to reduce the possibility of account owners outliving their retirement savings. These final regulations are effective for contracts purchased on or after July 2, 2014.

Miscellaneous Compliance Concerns • 181

The regulations modify the RMD rules by placing limits on the amount of assets that can be used for QLACs, delaying required distributions until age 85, and reducing account balances used to calculate RMDs. If an annuity contract is purchased with Roth IRA assets, it is not considered a QLAC because Roth IRA owners are exempt from the RMD rules.

RMD Calculation ChangesWhile IRA RMDs generally are calculated using the prior year-end account balance, the regulations provide an adjustment to this balance if the account owner purchases a QLAC (Treas. Reg. 1.401(a)(9)-5, Q&A 3). The QLAC’s value is subtracted from the account balance to arrive at the amount to use for the RMD calculation. This eliminates the need to begin taking distributions from the QLAC earlier than anticipated, which would increase the cost of the annuity and reduce the account balance faster than necessary.

Qualified Charitable DistributionsThe qualified charitable distribution (QCD) option allows Traditional and Roth IRA owners and beneficiaries age 70½ or older to donate up to $100,000 of IRA assets per year tax free to qualifying charitable organizations. A QCD satisfies an IRA owner’s or beneficiary’s required minimum distribution for the applicable year. First available in 2006, the QCD was created by the Pension Protection Act of 2006 as a temporary provision. It was extended by subsequent laws in two-year increments through 2013. In December 2014, Congress passed legislation, which once again extended the provision through December 31, 2014. Finally, in December 2015, the President signed into law the Consolidated Appropriations Act of 2016, which not only extended QCDs through 2015, but made them permanent.

A QCD must be paid directly to a qualified charity (defined in IRC Sec. 170(b)(1)(A)). Distributions paid directly to the IRA owner are not eligible for QCD treatment. Even though the payments are to be made directly to the charity, financial organizations must report these distributions like they would any other distributions to the IRA owner. The distributions are reported on the year’s Form 1099-R that the distribution occurred, and are reported in the IRA owner’s name and Social Security number with the distribution code for Box 7 that normally would apply (generally code 7 for Traditional IRAs and codes Q or T for Roth IRAs).

RMDs and Roth IRAsThe RMD rules do not apply to Roth IRA owners during their lifetimes, but distribution requirements apply after a Roth IRA owner’s death (IRC Sec. 408A(c)(5)).

IRA Beneficiary Distribution Procedures

Financial organizations must pay out IRA assets to beneficiaries after the death of IRA owners and must properly report these distributions as well. When proper beneficiary documentation is not in place or is not found in the IRA owner’s files, financial organizations may end up paying out IRA assets improperly. Keeping an IRA owner’s beneficiary information complete and up to date is the best way to avoid the potential headaches associated with beneficiary distributions. By retaining proper beneficiary information while IRA owners are alive, financial organizations can greatly minimize the number of distribution problems that will be encountered after an IRA owner’s death.

182 • Miscellaneous Compliance Concerns

Steps to Take While IRA Owner Is AlivePreparing for IRA beneficiary distributions actually begins before the IRA owner dies. It begins when the IRA is established.

Gather Complete InformationWhen an individual opens an IRA, he typically will complete the beneficiary designation section of the IRA application, if included, or the IRA administrator will present the individual with a beneficiary designation form. Although IRA owners are not required to name a beneficiary when establishing an IRA, most appreciate the opportunity to name an individual or entity to inherit their IRA assets after they die. The application or form should gather the beneficiary’s name, address, Social Security number, relationship to IRA owner, and designation as primary or contingent beneficiary. If the individual does not have all the information available at the time of establishment, the IRA should be flagged for follow-up inquiries until the IRA administrator has all of the necessary information.

Update InformationMany life events can affect an IRA owner’s beneficiary designation. Every three to five years, IRA administrators may wish to have IRA owners review their current beneficiary designations. Often, IRA departments will mail out a change of beneficiary form to all IRA owners with a request that the IRA owner review current designations and make changes as necessary.

IRA Owner Informs BeneficiariesOne of the most helpful actions that an IRA owner can take is to inform the listed beneficiaries that they are beneficiaries. The IRA owner should instruct any listed beneficiaries to contact the IRA department upon the IRA owner’s death. Some IRA owners are reluctant to inform their family, friends, or charities that they are beneficiaries, especially if there is a chance that the IRA owner will change whom she has named as beneficiary. Unfortunately, beneficiaries who do not know that they are beneficiaries often miss deadlines for certain elections or distributions, resulting in penalties. And sometimes, IRA assets that are never claimed by beneficiaries end up in state escheat accounts.

Steps to Take After the IRA Owner’s DeathFinancial organizations may learn about an IRA owner’s death in many ways. They may read an obituary, hear it from another client, or find out from an IRA beneficiary or the IRA owner’s executor.

NotificationThe first thing that an IRA administrator typically will do upon receiving notification of an IRA owner’s death is to retrieve the IRA owner’s most current beneficiary designation. Although the IRA department is not responsible for contacting IRA beneficiaries, many IRA departments have made a policy decision to send beneficiaries a letter. Such a letter should apprise the individual that he is the beneficiary of an IRA, list the distribution options available, and, most importantly, explain any deadlines for required elections. If the beneficiary designation information is accurate and up to date, beneficiaries should be easy to locate.

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Separate AccountsThe next step for the IRA administrator is to set up separate accounts for each of the beneficiaries. Simply put, separate accounting generally consists of a new entry on the IRA department’s computer system for each beneficiary to track the gains and losses of each beneficiary’s share of the assets (Treas. Reg. 1.401(a)(9)-8, Q&A 2 and 3). Separate accounting allows the beneficiary more distribution options and permits the IRA department to accurately report beneficiary fair market values and distributions to the IRS in the beneficiary’s name and Social Security number. The IRA department does not need the beneficiary’s permission nor does the beneficiary sign any documents to establish the separate accounts.

NOTE: Separate accounting with different beneficiaries under the plan may be established either before or after the IRA owner’s death. But beneficiaries do not receive ownership of the assets until after the IRA owner’s death.

Death Certificate and IdentificationIRA administrators may require a certified copy of the IRA owner’s death certificate. Once the IRA department has the death certificate, it can feel comfortable paying out to and reporting in the beneficiary’s name. Each beneficiary also should provide personal identification before receiving any distributions.

Written ElectionsIf an IRA owner dies before his required beginning date (RBD), each beneficiary should make a written election of which distribution option the beneficiary chooses. If a beneficiary chooses to take an immediate total distribution, no election is required. If death occurs before the RBD, the beneficiary generally must make the election by December 31 of the year following the year of death if the beneficiary is a nonspouse or a spouse who is not the sole designated beneficiary. A spouse who is the sole designated beneficiary must make an election by the earlier of the end of the year in which life expectancy payments must begin or the end of the year containing the fifth anniversary of the IRA owner’s death. If the beneficiary does not make a timely election, the beneficiary loses the chance to choose a distribution method and must use the IRS default provision or, if available, the default provision in the IRA plan agreement.

Beneficiary Distribution OptionsEach IRA beneficiary is responsible for making sure that a distribution is taken by the deadline for her chosen distribution option. Beneficiaries also are responsible for calculating the amount of any required distribution. Some IRA departments help beneficiaries with the calculations if the beneficiary has chosen life expectancy payments. If the IRA department uses a computer program to perform these calculations, the information for the beneficiary must be programmed into the system.

Often, a spouse beneficiary will choose to transfer the decedent’s IRA into the spouse beneficiary’s own IRA. The IRA administrator should get a transfer request form from the spouse beneficiary to verify the spouse’s intention. If the spouse does not have an existing IRA, the spouse should sign IRA opening documents before the transfer takes place.

Withdrawal and Withholding FormsAn IRA beneficiary should sign a withdrawal statement, including a withholding election, at the time of each distribution. Although the withdrawal statement is not an IRS requirement, it gathers and verifies the information for distribution reporting, which is an IRS requirement. The withholding notice and election also are IRS requirements.

184 • Miscellaneous Compliance Concerns

ReportingThe final step is IRS reporting. Financial organizations report all distributions to IRA beneficiaries to the IRS on Form 1099-R. The financial organization reports the distribution in the beneficiary’s name and Social Security number. The financial organization reports a Traditional IRA distribution using code 4, Death—no matter what the beneficiary’s age—so that the beneficiary will not be subject to the 10 percent early distribution penalty tax if under age 59½. The only exception to the reporting requirement is when a spouse beneficiary transfers the decedent’s IRA into the spouse’s own IRA. Transfers are nonreportable.

Traditional IRA Beneficiary Options

Distribution rules for IRA beneficiaries are contained in Treasury regulations. Final regulations were released in Treasury Decision (TD) 8987 in April 2002, and became mandatory for distributions for 2003 and later years. While the final regulations outline the available rules, some distribution options and the timing of elections may vary depending on the IRA plan document language.

IRA beneficiaries always have the option of taking a full distribution of the inherited IRA assets. When doing so, the distribution will be includible in the beneficiary’s taxable income for the year of distribution. But the beneficiary will not be subject to an early distribution penalty tax if under the age of 59½ because death is an exception to the early distribution penalty tax. If the beneficiary is not taking a full distribution, there are minimum distribution requirements that apply. Beneficiary distribution options typically depend upon whether the IRA owner died before or after the required beginning date for RMDs, and whether the beneficiary is a spouse.

Determining the Designated Beneficiary An IRA owner’s designated beneficiary is determined based on the beneficiaries listed as of the date of death, who remain beneficiaries as of September 30 of the calendar year following the calendar year of the IRA owner’s death (Treas. Reg. 1.401(a)(9)-4, Q&A 4). The designated beneficiary is the beneficiary whose life expectancy is used when determining RMDs.

Disclaimer or Complete Distribution Before Determination DateExcept as provided in Treas. Reg. 1.401(a)(9)-6 (dealing with RMDs for defined benefit plans and annuity contracts), any beneficiary who takes a complete distribution of his share or disclaims his share during the period between the IRA owner’s death and September 30 of the year following the year of death is disregarded when determining the designated beneficiary (Treas. Reg. 1.401(a)(9)-4, Q&A 4). As a point of clarification, any disclaimer of benefits must meet the requirements of IRC Sec. 2518. Disclaimers are explained further in Chapter 7, Handling Legal Issues.

Surviving Spouse as Sole Beneficiary DiesIf the sole designated beneficiary on the September 30 beneficiary determination date is the IRA owner’s spouse, and the spouse dies after the IRA owner, but before her life expectancy payments have begun, then the designated beneficiary for determining distributions is the designated beneficiary of the surviving spouse. Moreover, such designated beneficiary is determined based on the beneficiaries named as of the date of the surviving spouse’s death who remain beneficiaries as of September 30 of the year following the year of the surviving spouse’s death.

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Death of Beneficiary Has No EffectThe final RMD regulations provide that if the beneficiary dies during the period between the IRA owner’s date of death and September 30 of the year following the year of the IRA owner’s death (the beneficiary determination date), that beneficiary continues to be treated as the designated beneficiary as of the September 30 determination date for determining the distribution period.

Trust as BeneficiaryIf certain requirements are met and an IRA owner named a trust as beneficiary, the underlying beneficiary of the trust is treated as the designated beneficiary for calculating required distributions, but distributions must be made to the trust. (Treas. Reg. 1.401(a)(9)-4, Q&A 5(b)).

The trust must

• be valid under state law,

• be irrevocable or be revocable while the IRA owner is alive, provided that the trust becomes irrevocable upon the individual’s death, and

• have identifiable beneficiaries listed.

In addition, the trustee of the trust must provide the financial organization with either a copy of the trust instrument or qualifying documentation concerning the trust (Treas. Reg. 1.401(a)(9)-4, Q&A 6).

NOTE: RMD regulations state that the trustee of the trust must provide the documentation to the IRA administrator by October 31 of the calendar year immediately following the year of death. The documentation must show who the beneficiaries are as of September 30 of the year following the year of death.

RMDs Before Death – If the trust documentation is provided according to the requirements and the spouse is the sole beneficiary of the trust, the spouse will be treated as the sole beneficiary, presumably permitting the use of a more favorable joint life expectancy if the spouse is more than 10 years younger than the IRA owner.

RMDs After Death – Following the IRA owner’s death, the trustee of the trust must provide a copy of the trust instrument or other qualifying trust documentation to the financial organization. Under the final RMD regulations, the deadline for providing the documentation is October 31 (rather than December 31) of the year following the year of the IRA owner’s death, unless the lifetime distribution period for an individual is the joint life expectancy of the individual and spouse. The documentation must show who the beneficiaries are (including contingent and remaindermen beneficiaries) as of September 30 of the year following the year of death.

Effect of Multiple Beneficiaries of the Trust – If there are multiple beneficiaries of a qualified trust, the oldest beneficiary’s life expectancy must be used to determine the distribution period for calculating payments. The final regulations clarify that the separate accounting rules of Treas. Reg. 1.401(a)(9)-8, Q&A 2, are not available to beneficiaries of a trust (Treas. Reg. 1.401(a)(9)-4, Q&A 5(c)).

186 • Miscellaneous Compliance Concerns

Surviving Spouse Treats IRA as OwnA surviving spouse beneficiary is deemed to have elected to treat the deceased’s IRA as the surviving spouse’s own if he

• redesignates the IRA as his own,

• fails to remove a required distribution, or

• makes a contribution to the deceased IRA owner’s IRA.

For a spouse beneficiary to elect to treat an IRA as her own, the spouse beneficiary must be the sole, direct beneficiary of the IRA, with unlimited right to withdraw amounts from the IRA (Treas. Reg. 1.408-8, Q&A 5). Under these circumstances, the spouse beneficiary may elect to treat the IRA as her own at any time after the IRA owner’s death. If the spouse elects to treat the IRA as her own in the year of death, she still must satisfy the IRA owner’s RMD for the year if the IRA owner had not already done so before death.

Although not clearly stated in the RMD regulations, IRS officials confirmed to Ascensus that the option for a surviving spouse beneficiary to transfer the assets to his own IRA, which is one method of “treating-as-own,” also may be applied when the spouse is one of multiple beneficiaries if separate accounting is properly established. Spouse beneficiaries in this position may prefer to take a conservative approach and distribute and roll over rather than transfer such assets to their own IRAs. The treat-as-own election may not be made if a trust is the beneficiary of the IRA, even if the spouse is the sole beneficiary of the trust.

A surviving spouse may transfer the year of death RMD as long as she satisfies the distribution by the required deadline (generally, December 31) (Treas. Reg. 1.408-8, Q&A 5 and 9). The distribution must be calculated based on the deceased IRA owner and her December 31 prior-year IRA balance. If distributed after the transfer is made it will be reported as a distribution from the surviving spouse’s own IRA, and if she is under age 59½, a 10 percent early distribution penalty tax may apply.

If the spouse beneficiary transfers the IRA to his own IRA in the year after the year of death, then the spouse beneficiary is treated as the IRA owner. An RMD, if one is due, is calculated with the spouse as the IRA owner, using the December 31 prior-year balance of the original IRA owner’s account.

A spouse beneficiary may not roll over an RMD. The final regulations clarify that a spouse beneficiary, even if she is not the sole beneficiary, may take a distribution and roll over the amount minus any RMD to her own IRA within 60 days.

Distribution Option DefinitionsThere are various distribution options and calculation methods available for beneficiaries who are required to take distributions. The options are outlined in the tables following this section. A familiarity with some basic terms is helpful when determining the distribution amount.

Five-Year RuleThe five-year rule is available when the IRA owner dies before his RMD required beginning date. This option allows the beneficiary to take distributions in any amount at any time as long as the beneficiary totally depletes her portion of the IRA by December 31 of the year containing the fifth anniversary of the IRA owner’s death (IRC Sec. 401(a)(9)(B)(ii)).

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Single Life Expectancy PaymentsThe single life expectancy payment option requires a beneficiary to take distributions of a minimum amount based on the single life expectancy of either the beneficiary or the deceased IRA owner, beginning by December 31 of the year following the year of the IRA owner’s death. The account balance is divided by a life expectancy figure found in the Single Life Expectancy Table. The beneficiary must continue to take annual minimum distributions. (The Single Life Expectancy Table follows these definitions.)

RecalculationAn option for a spouse beneficiary is to take single life expectancy payments, recalculated. Recalculation means that in each year, the distribution is calculated using the age the spouse will become in the distribution year to find a life expectancy divisor in the Single Life Expectancy Table.

NonrecalculationIn some situations, beneficiary distributions are based on single life expectancy payments, nonrecalculated. For this calculation method, the first year distribution is based on a divisor obtained in the Single Life Expectancy Table. For each subsequent year, the life expectancy divisor used to calculate the amount in the previous year is reduced by one.

Treat IRA as OwnA spouse beneficiary may elect to treat the IRA as his own. When treating as his own, the spouse essentially becomes the IRA owner, and the basic rules are applied as such. If eligible to treat as his own, the spouse may do so at any time after the IRA owner’s death.

Distribute and RollA spouse beneficiary may at any time take a distribution of her share of the decedent’s IRA and roll it over to another IRA or eligible retirement plan of her own following the rollover rules that apply to IRAs. Nonspouse beneficiaries may not do rollovers.

Beneficiary Election DeadlineIf the IRA owner dies before his required beginning date for RMDs (i.e., April 1 of the year after the IRA owner turns age 70½), the beneficiary generally must elect a method of payment (life expectancy payments or the five-year rule) by the earlier of December 31 of the year life expectancy payments are required to commence, or December 31 of the year containing the fifth anniversary of death. Life expectancy payments generally must commence by December 31 of the year after the IRA owner’s death. But for a spouse beneficiary who is the sole beneficiary of the IRA, life expectancy payments must commence by December 31 of the year the IRA owner would have turned age 70½.

188 • Miscellaneous Compliance Concerns

Single Life Expectancy Table

Table I(Single Life Expectancy) (For Use by Beneficiaries)

Age Life Expectancy Age Life Expectancy 0 82.4 1 81.6 2 80.6 3 79.7 4 78.7

56 28.7 57 27.9 58 27.0 59 26.1 60 25.2

5 77.7 6 76.7 7 75.8 8 74.8 9 73.8

61 24.4 62 23.5 63 22.7 64 21.8 65 21.0

10 72.8 11 71.8 12 70.8 13 69.9 14 68.9

66 20.2 67 19.4 68 18.6 69 17.8 70 17.0

15 67.9 16 66.9 17 66.0 18 65.0 19 64.0

71 16.3 72 15.5 73 14.8 74 14.1 75 13.4

20 63.0 21 62.1 22 61.1 23 60.1 24 59.1

76 12.7 77 12.1 78 11.4 79 10.8 80 10.2

25 58.2 26 57.2 27 56.2 28 55.3 29 54.3

81 9.7 82 9.1 83 8.6 84 8.1 85 7.6

30 53.3 31 52.4 32 51.4 33 50.4 34 49.4

86 7.1 87 6.7 88 6.3 89 5.9 90 5.5

35 48.5 36 47.5 37 46.5 38 45.6 39 44.6

91 5.2 92 4.9 93 4.6 94 4.3 95 4.1

40 43.6 41 42.7 42 41.7 43 40.7 44 39.8

96 3.8 97 3.6 98 3.4 99 3.1 100 2.9

45 38.8 46 37.9 47 37.0 48 36.0 49 35.1

101 2.7 102 2.5 103 2.3 104 2.1 105 1.9

50 34.2 51 33.3 52 32.3 53 31.4 54 30.5 55 29.6

106 1.7 107 1.5 108 1.4 109 1.2 110 1.1 111 and over 1.0

Miscellaneous Compliance Concerns • 189

Death Before the Required Beginning DateFollowing are the regulatory distribution options for beneficiaries when the IRA owner’s death occurs before his required beginning date, which is April 1 following the year the IRA owner reaches age 70½. Depending upon who the beneficiary is, the options include the five-year rule, single life expectancy payments, treating the IRA as his own, or distributing and rolling over the IRA assets. An IRA plan agreement could be designed to not include all these options. IRA administrators must always check the IRA document for the available options.

Death Before the Required Beginning Date Beneficiary Options

DefaultWhen the IRA owner’s death occurs before the required beginning date (RBD), the distribution default as defined in regulations is life expectancy payments (Treas. Reg. 1.401(a)(9)-3, Q&A 4). Therefore, when death occurs before the RBD and the beneficiary does not distribute the amount, life expectancy payments will apply unless plan language dictates otherwise, an election for the five-year rule has been made, a spouse beneficiary treats as own or rolls over the assets, or no beneficiary exists. The five-year rule becomes the default if the beneficiary is not a person.

Spouse Is Sole BeneficiaryNonspouse Beneficiary or

Spouse Is Not Sole BeneficiaryNo Beneficiary or

Nonperson Beneficiary

• Five-year rule

• Single life expectancy payments, recalculated, begun by the later of 12/31 of year following year of death or 12/31 of IRA owner’s 70½ year

• Treat IRA as own (transfer)

• Distribute and roll over to own IRA or eligible retirement plan

Default: Single life expectancy payments

• Five-year rule

• Single life expectancy payments based on oldest beneficiary*, nonrecalculated, begun by 12/31 of year following year of IRA owner’s death

• Spouse beneficiary may distribute and roll over her share to own IRA or eligible retirement plan

Default: Single life expectancy payments

• Five-year rule

* If separate accounting is applied by December 31 of the year after death, life expectancy payments may be determined separately for each beneficiary, using his own life expectancy.

190 • Miscellaneous Compliance Concerns

Distributions Following the Sole Spouse Beneficiary’s DeathIf the surviving spouse dies after the IRA owner, for years after the year of the spouse’s death, payments switch to nonrecalculation using the spouse’s year-of-death life expectancy minus one for each year after the year of death. Payments must begin by December 31 of the year following the year of the spouse beneficiary’s death. This assumes the surviving spouse had begun life expectancy payments.

RMD regulations provide an exception to this rule if the surviving spouse has not yet begun to receive payments and designates a beneficiary under the inherited IRA. When the IRA owner’s death occurs before the RBD, the sole spouse beneficiary may delay single life expectancy payments until the IRA owner’s age 70½ year. If, upon the surviving spouse’s death, she had designated a beneficiary under the account but had not yet begun payments, the distribution options are to be applied as if the surviving spouse were the IRA owner (Treas. Reg. 1.401(a)(9)-3, Q&A 5).

Under these circumstances, the surviving spouse’s designated beneficiary may choose the five-year rule or single life expectancy payments (based on the designated beneficiary’s age in the year following the year of death, nonrecalculated). If there is no designated beneficiary as of the September 30 determination date (September 30 of the year following the surviving spouse’s year of death), the five-year rule for distributions would apply (Treas. Reg. 1.401(a)(9)-4, Q&A 4(b)). The regulations indicate, however, that the special rule for spouse beneficiaries to delay the onset of life expectancy payments until the IRA owner would have been 70½ does not apply if the surviving spouse is remarried and names his new spouse as a beneficiary under this inherited account (Treas. Reg. 1.401(a)(9)-3, Q&A 5).

Automatic Waiver of Excess Accumulation Penalty TaxIf a beneficiary, who is the sole beneficiary, fails to take life expectancy payments when required during the first five years after the year of the IRA owner’s death, the regulations provide for an automatic waiver of the excess accumulation penalty tax if the entire benefit is distributed by the end of the fifth year following the IRA owner’s death (Treas. Reg. 54.4974-2, Q&A 7(b)).

NOTE: Ascensus sought guidance from the IRS as to whether one beneficiary, among multiple IRA beneficiaries, who fails to timely take a required life expectancy payment, may avoid the excess accumulation penalty tax by applying the five-year rule. An IRS spokesperson indicated that if separate accounting is timely established, the beneficiary of the separately accounted share can be treated as the sole beneficiary of that share for purposes of this automatic waiver. Therefore, the automatic waiver may be used if separate accounting exists.

Death On or After the Required Beginning DateFor years after the IRA owner’s death, if death occurs after the required beginning date (RBD), the final regulations require that distributions continue using the longer of

• the remaining life expectancy of the designated beneficiary, or

• the remaining life expectancy of the IRA owner, fixed in the year of death, and nonrecalculated in subsequent years.

Miscellaneous Compliance Concerns • 191

Death On or After the Required Beginning Date Beneficiary Options

EXAMPLE: Death On or After the RBDJanell, age 75, died in 2017. Janell had named her sister Marie, age 84, as the beneficiary of her IRA. Marie’s payout will be based on her nonrecalculated single life expectancy or Janell’s nonrecalculated single life expectancy, whichever is longer. Marie must take the first distribution by December 31, 2018.

In 2018, Marie’s single life expectancy for an 85-year-old is 7.6 (determined for the year following the year of death); Janell’s single life expectancy is 12.4 (determined by subtracting one from her life expectancy that was found for the year of her death). Consequently, the 2018 distribution is determined by dividing the December 31, 2017, IRA balance by Janell’s nonrecalculated life expectancy figure of 12.4 because her nonrecalculated life expectancy is longer than Marie’s life expectancy.

Spouse Is Sole BeneficiaryNonspouse Beneficiary or

Spouse Is Not Sole BeneficiaryNo Beneficiary or

Nonperson Beneficiary

• Single life expectancy payments based on

THE LONGER OF

the spouse beneficiary’s life expectancy, recalculated (starting in year after death), begun by 12/31 of year following the year of the IRA owner’s death

OR

the IRA owner’s life expectancy, nonrecalculated (starting in year of death, reduced by one), begun by 12/31 of year following the year of IRA owner’s death

• Treat IRA as own (transfer)

• Distribute and roll over to own IRA or eligible retirement plan

• Single life expectancy payments based on

THE LONGER OF

the oldest beneficiary’s life expectancy,* nonrecalculated (starting in year after death), begun by 12/31 of year following the year of the IRA owner’s death

OR

the IRA owner’s life expectancy, nonrecalculated (starting in year of death, reduced by one), begun by 12/31 of year following the year of IRA owner’s death

• Spouse beneficiary may distribute and roll over his share to own IRA or eligible retirement plan

• Single life expectancy payments based on IRA owner’s life expectancy, nonrecalculated (starting in year of death, reduced by one), begun by 12/31 of year following the year of IRA owner’s death

* If separate accounting is applied by December 31 of the year after death, life expectancy payments may be determined separately for each beneficiary, using his own life expectancy.

192 • Miscellaneous Compliance Concerns

Beneficiary Options for Trust as BeneficiaryIf a trust meets the qualifications noted under “Trust as Beneficiary” earlier in this section, single life expectancy payments may be calculated by looking through the qualified trust to the oldest underlying beneficiary. In some situations, the trust also has the option of choosing the five-year rule for distributions. The trust must take a required distribution by December 31 of the year following the year of the IRA owner’s death, unless

• plan language dictates otherwise,

• an election for the five-year rule applies, or

• the sole spouse beneficiary of a qualified trust delays payments until the year the IRA owner would have turned 70½.

Some of the rules that apply in spouse beneficiary situations do not apply when a trust is named as beneficiary, even if a spouse is a trust beneficiary.

• A sole spouse beneficiary of a qualified trust may not elect to treat the IRA as his own (Treas. Reg. 1.408-8, Q&A 5).

• The option for a spouse beneficiary of a trust to distribute and roll over IRA assets received through a trust to his own IRA has been allowed by the IRS only through private letter rulings.

• Separate accounting rules under Treas. Reg. 1.401(a)(9)-8, Q&A 2, are not available to trust beneficiaries (Treas. Reg. 1.401(a)(9)-4, Q&A 5(c)). Therefore, if there are multiple beneficiaries of a qualified trust, the oldest beneficiary’s life expectancy must be used to determine the single life expectancy payment amount.

• If a nonperson, such as a charity, is named as one of multiple beneficiaries of a trust, the only distribution option available to the trust is the five-year rule when death occurs before the required beginning date.

Qualified Trust Options if Death Before the Required Beginning Date

Spouse Is Sole Beneficiary of Qualified Trust

Nonspouse Beneficiary of Qualified Trust, or Spouse Not Sole Beneficiary of Qualified Trust

• Five-year rule

• Single life expectancy payments based on spouse beneficiary’s life expectancy, recalculated, begun the later of 12/31 of the year following year of death or 12/31 of IRA owner’s 70½ year

• Five-year rule

• Single life expectancy payments based on oldest beneficiary’s life expectancy, nonrecalculated, begun by 12/31 of year following year of death

NOTE: A qualified trust cannot have a nonperson beneficiary. If a trust does have a nonperson beneficiary, the only option is the five-year rule, which is the same as for a nonperson beneficiary of a Traditional IRA when the owner died before the RBD or for a nonspouse beneficiary of a Roth IRA. Refer to the third column under the tables, “Death Before the Required Beginning Date Beneficiary Options” and “Roth IRA Beneficiary Options.”

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Qualified Trust Options if Death On or After the Required Beginning Date

Spouse Is Sole Beneficiary of Qualified Trust

Nonspouse Beneficiary of Qualified Trust, or Spouse Not Sole Beneficiary of Qualified Trust

• Single life expectancy payments based on

THE LONGER OF

the spouse beneficiary’s life expectancy,recalculated (starting in year after death), begunby 12/31 of year following year of death

OR

the IRA owner’s life expectancy, nonrecalculated (starting in year of death, reduced by one), begun by 12/31 of year following year of death

• Single life expectancy payments based on

THE LONGER OF

the oldest beneficiary’s life expectancy,nonrecalculated (starting in year after death),begun by 12/31 of year following year of death

OR

the IRA owner’s life expectancy, nonrecalculated (starting in year of death, reduced by one), begun by 12/31 of year following year of death

NOTE: A qualified trust cannot have a nonperson beneficiary. If a trust does have a nonperson beneficiary, the only option is to take single-life expectancy payments, based on the IRA owner, nonrecalculated. This option is the same as for a nonperson beneficiary of a Traditional IRA when the owner died on or after the RBD. Refer to the third column under the previous tables, “Death On or After the Required Beginning Date Beneficiary Options.”

Sole Spouse Beneficiary of a Qualified TrustThe IRS confirmed that the final RMD regulations allow payout to a qualified trust with a spouse as the sole beneficiary, using any of the distribution period calculation options (life expectancy payments) that would normally be available if the spouse beneficiary were the direct beneficiary of the IRA. For example, if the IRA owner dies before her required beginning date, distributions to the trust with a spouse beneficiary could be delayed until the deceased IRA owner would have reached age 70½, using the spouse beneficiary’s age, recalculated.

Keep in mind the treat-as-own election may not be made if the trust is the beneficiary of the IRA, even with the spouse as beneficiary of the trust (Treas. Reg. 1.408-8, Q&A 5).

Spouse Beneficiary of Trust or Estate and RolloversThe preamble of the final RMD regulations expressly prohibits a spouse beneficiary of a trust that is named as an IRA beneficiary from treating IRA assets received through the trust as her own IRA assets. Although not directly addressed in the regulations, it is reasonable to conclude that this prohibition applies to a surviving spouse of an estate that is the direct IRA beneficiary. Recall that the treat-as-own election is made or is deemed to be made if a sole spouse beneficiary redesignates the IRA as her own, fails to remove a required distribution, or makes a contribution to the deceased IRA owner’s IRA. A transfer of assets oftentimes is considered a de facto redesignation of the IRA assets.

Some private letter rulings (PLRs), however, have allowed a spouse who is the sole beneficiary of a qualified trust, and who has unlimited rights to withdraw the trust assets, to roll over the IRA assets to her own IRA (PLRs 200833028, 200934046, 200449040, and 200245055). Further, an IRS official commented to Ascensus that if separate accounting is properly in place, a spouse who is among multiple beneficiaries of a qualified trust may distribute and roll over the IRA assets to his own IRA as well. Note that IRS comments to Ascensus are not official IRS opinion and should be treated with caution.

194 • Miscellaneous Compliance Concerns

Similar rulings have been made in some PLRs that address the option of a spouse beneficiary of an estate, in which the estate is the direct beneficiary of the IRA assets, to complete a rollover of IRA assets (PLRs 201211034, 201212021, 200324059, 200317032, and 200433026). These rulings indicate that if the spouse beneficiary of an estate is the sole personal representative of the decedent’s estate, with the unlimited right to withdraw assets, then he would have the option to distribute and roll over the assets to his own IRA.

NOTE: Only the person(s) to whom the PLR is issued may rely upon its ruling. If a surviving spouse seeks to roll over IRA assets received through a trust or estate, Ascensus recommends that the surviving spouse seek legal advice first to determine whether applying for a PLR is appropriate.

Beneficiary Distributions From an Inherited IRAThe Pension Protection Act of 2006 (PPA) requires that distributions must begin from the IRA following a nonspouse beneficiary direct rollover from an employer-sponsored retirement plan (IRC Sec. 402(c)(11)(A)(iii)). The payment method will be either the five-year rule or minimum annual life expectancy payments begun in the year after the rollover. The beneficiary distribution is generally based on the method that was available and applicable under the retirement plan, either as dictated by plan provisions or by participant or beneficiary election.

If the five-year rule applied under the plan before the rollover (either by plan provision or by participant or beneficiary election), the five-year rule applies under the IRA—the entire amount rolled over must be distributed by December 31 of the year containing the fifth anniversary of death. If single life expectancy payments applied under the plan, the payments must continue under the IRA using the same distribution period that would have been used under the plan if the rollover had not occurred. If a beneficiary is required to take a life expectancy payment in the year the rollover request is made, the payment is not eligible for rollover and the retirement plan must distribute it to the beneficiary. Therefore, the first life expectancy payment from the inherited IRA is required in the year following the year of the rollover.

A special rule, however, permits a nonspouse beneficiary who is subject to the five-year rule under the plan to switch to the life expectancy payment method. If a nonspouse beneficiary makes this switch, the beneficiary must take the life expectancy distribution from the plan and directly roll over the remaining balance to an inherited IRA before December 31 of the year following the death year, and must continue taking annual IRA payments, which must be calculated under the same life expectancy as was used under the plan.

Roth IRA Beneficiary Options

Unlike Traditional IRA owners, Roth IRA owners do not have to take required minimum distributions. Distributions to beneficiaries, however, are required. Because Roth IRA owners have no required beginning date (RBD) for distributions, an easy way to remember the distribution options available to Roth IRA beneficiaries is to treat all Roth IRA owner deaths as occurring before the RBD. With that in mind, the same beneficiary options that apply to Traditional IRAs when the IRA owner dies before the RBD apply to Roth IRA beneficiaries.

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Roth IRA Beneficiary Options

Spouse Is Sole BeneficiaryNonspouse Beneficiary or

Spouse Is Not Sole BeneficiaryNo Beneficiary or

Nonperson Beneficiary

• Five-year rule

• Single life expectancy payments, recalculated

• Treat IRA as own (transfer)

• Distribute and roll over to own Roth IRA

Default: Single life expectancy payments

• Five-year rule

• Single life expectancy payments, nonrecalculated

• Spouse beneficiary may distribute and roll over his share to own Roth IRA

Default: Single life expectancy payments

• Five-year rule

Roth IRA DocumentsIRS model Roth IRA forms (Form 5305-R, Roth Individual Retirement Trust Account, Form 5305-RA, Roth Individual Retirement Custodial Account, and Form 5305-RB, Roth Individual Retirement Annuity Endorsement) generally define these beneficiary options. Financial organizations should check their Roth IRA plan agreements to determine what distribution options are available under the IRA. Many plan agreements will reflect the options available under the IRS model documents, but may have supplementary language in Article IX allowing more options.

The March 2002 and October 2016 versions of the IRS model Roth IRA documents provides the following beneficiary options in Article V.

1. If a spouse is the designated beneficiary, the Roth IRA will be treated as his own, with no distribution required to be made to the spouse.

2. A nonspouse beneficiary may choose either the five-year rule or life expectancy payments.

• Under the five-year rule, the beneficiary takes a total distribution within five years (by December 31 of the year containing the fifth anniversary of the Roth IRA owner’s death).

• Under life expectancy payments, the beneficiary takes distributions over her own life expectancy (nonrecalculated), beginning by December 31 of the year following the year of the Roth IRA owner’s death.

If a nonspouse beneficiary does not choose an option by December 31 of the year following the Roth IRA owner’s death, life expectancy payments will apply.

When Spouse Is Sole BeneficiaryUnder the March 2002 Roth IRA model document instructions, the IRS indicates that a spouse who is a designated beneficiary (changed from sole beneficiary) will be treated as if the Roth IRA is her own. (An IRS official confirmed to Ascensus that the term “designated beneficiary” is synonymous with the term “sole beneficiary” in the context of the Roth IRA model forms.) As a result, if using the model document without supplementary language in Article IX, the spouse beneficiary

• would not have the beneficiary option of the five-year rule, and

• would not have the beneficiary option of life expectancy payments.

196 • Miscellaneous Compliance Concerns

Under these circumstances, a spouse beneficiary would not be eligible to take a death distribution, which is an exception to the 10 percent early distribution penalty tax and one of the four events for a qualified distribution, from the inherited Roth IRA. Financial organizations may add additional language to Article IX of the Roth IRA model form to allow additional options.

When Spouse Is Not Sole BeneficiaryUnder the March 2002 IRS model Roth IRA documents, a spouse who is not the designated beneficiary (changed from sole beneficiary) of a Roth IRA has all the options of a nonspouse beneficiary and, as a result, may

• elect the five-year rule, or

• receive life expectancy payments (nonrecalculated), beginning by December 31 of the year following the year of the Roth IRA owner’s death.

(An IRS official confirmed to Ascensus that the term “designated beneficiary” is synonymous with the term “sole beneficiary” in the context of the Roth IRA model forms.)

Under the final distribution regulations (Treas. Reg. 1.401(a)(9)), if a spouse beneficiary does not choose an option by December 31 of the year following the Roth IRA owner’s death, life expectancy payments will apply as the default. A clarification in the final distribution regulations provides that a spouse who is not the sole beneficiary may still distribute and roll over his share of the IRA assets to another Roth IRA. Furthermore, a principal IRS drafter of private letter rulings dealing with distribution issues stated that, presuming separate accounting was properly in place, the treat-IRA-as-own option would be available to a spouse who is one among multiple beneficiaries, in addition to the distribute-and-roll option. An IRS drafter of the final distribution regulations later verified this position as well. Practically speaking, however, because redesignating or renaming a portion of a decedent’s IRA as the spouse’s own IRA when multiple beneficiary interests exist is logistically impossible, a spouse beneficiary would transfer his share of the IRA assets to a separate IRA in his name.

More Spouse Beneficiary Options Available With Additional LanguageThe final distribution regulations indicate that spouse beneficiaries may have all the distribution options that are available to nonspouse beneficiaries, regardless of whether the spouse is the sole beneficiary of the Roth IRA. Financial organizations must supplement the language in the IRS model documents in Article IX or use prototype Roth IRA documents to accommodate all the distribution options that appear to be available for spouse beneficiaries.

Inherited Roth IRAs May Not Be Aggregated in Most CasesFinal Roth IRA regulations add that a Roth IRA beneficiary may not aggregate the inherited Roth IRA with any other Roth IRA she maintains, except for other Roth IRAs inherited from the same decedent. A spouse beneficiary who is the sole Roth IRA beneficiary may elect to treat the Roth IRA as her own, and aggregate her Roth IRAs.

Effect of Multiple Beneficiaries on DistributionOrdering rules apply to Roth IRA distributions based on the source of the accumulated assets in the Roth IRA (i.e., regular contributions, conversion contributions, or earnings). If multiple beneficiaries are named for a Roth IRA, each beneficiary is credited with a pro rata share of each source of Roth IRA assets following the Roth IRA owner’s death (Treas. Reg. 1.408A-6, Q&A 11).

Handling Legal Issues • 197

Chapter 7

Handling Legal IssuesHandling Legal Issues

Power of Attorney

Guardianship

Creditors of IRAs

Investment Protection for IRAs

Community and Marital Property

Transfers Incident to Divorce or Legal Separation

Beneficiary Issues

Missing IRA Owners and Beneficiaries

Abandoned IRAs

Small Estate Administration

Minors as IRA Owners

Mergers and Acquisitions

Hold Harmless Language

Final Fiduciary Rule

Prohibited Transactions

Abusive Tax-Shelter Transactions

IRA Fees

Handling Legal Issues

Financial organizations generally should refrain from giving tax or legal advice to IRA owners. This function should be left to tax advisors and attorneys. They play an important role in advising individuals about their retirement needs.

198 • Handling Legal Issues

As a practical matter, however, financial organizations often find themselves fielding legal questions. These questions may extend well beyond the bounds of IRA maintenance. Sometimes these issues need to be referred to the financial organization’s attorney. Other times, the attorney is able to establish written guidelines for financial organizations to follow to ensure the proper handling of matters that are likely to arise on a fairly regular basis.

Financial organizations must be alert to legal issues that may arise and to the laws that govern these issues. IRAs are governed, for the most part, by federal laws. State laws, however, may have an effect as well. The following are bodies of state law that may affect retirement plans.

• Financial organization law (e.g., credit union charters or insurance company regulations)

• State tax law

• Property law

• Probate law

• Trust law

• Family law

Power of Attorney

A power of attorney is a written document authorizing one person, known as the attorney-in-fact or agent, to act on behalf of another person, known as a principal or grantor. Powers of attorney often are needed by individuals who will be unavailable to conduct their financial business for a limited period of time. An individual may wish to have a family member or friend conduct his personal affairs while he is unable to do so. This may include authorizing someone to make contributions or take distributions from an IRA on behalf of the ill or absent individual.

Often the authority to act is limited by the principal. It may be limited to a certain time period or it may be limited in scope. A nondurable power of attorney terminates if the principal becomes legally incompetent. With a durable power of attorney, the principal’s incompetence does not terminate the agent’s authority. Typically, the durable power of attorney document must contain language indicating that the agent’s power becomes or remains effective upon the principal’s incapacity or incompetence. Whether durable or nondurable, a properly executed power of attorney may confer broad authority to the agent.

Some financial organizations offer “fill in the blank” power of attorney forms, typically drafted by the financial organization’s attorney. This permits a client, such as an IRA owner, to grant authority to an agent with minimal effort. Often these forms are used to conduct routine IRA (or employer-sponsored retirement plan) transactions, such as deposits or investment renewals.

Financial organizations offering “fill in the blank” power of attorney forms must be careful not to provide legal advice to the IRA owner completing the document. Because of this concern, some financial organizations choose not to provide such forms, and insist that IRA owners have their own lawyers draft the power of attorney document.

Any competent adult generally may execute a valid power of attorney. As with wills, powers of attorney need not be drafted by a lawyer, but many individuals prefer to retain a lawyer to ensure that the power of attorney is properly drafted and executed. In determining whether the power of attorney is valid, the following issues should be considered.

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• Are the principal and the attorney-in-fact identified?

• What type of power is granted (durable or nondurable)?

• What is the nature and scope of the power granted? (Is there authority to conduct IRA transactions?)

• What is the effective date of the document? Has the power expired or terminated?

• Is the power of attorney signed and dated by the principal, and is the document acknowledged (if necessary) by the attorney-in-fact?

• Does state law provide protection for a financial organization that acts upon a power of attorney that appears to be valid?

NOTE: The rules for determining whether a valid power of attorney exists and how it may be used are governed by state law. These statutory requirements generally are contained within the state probate code. Although power of attorney rules between states may be similar (e.g., more than one-half of the states have adopted the Uniform Durable Power of Attorney Act), even minor variations in wording may result in failure to satisfy the state’s drafting requirements or may modify how the document is interpreted. Consequently, the suggestions here are not intended to address any specific state requirements. Financial organizations should consult their own legal counsel to determine the validity of power of attorney documents or to draft guidelines to assist the financial organization’s staff in making that determination.

Financial Organization DutiesBecause attorneys-in-fact step into the shoes of the principal, financial organizations generally must follow the instructions of the attorney-in-fact, just as they would with an IRA owner. In other words, provided that the agent does not exceed the scope of the authority conferred in the power of attorney, the financial organization must treat the agent just like the IRA owner.

Although a financial organization should not refuse to accept the authority conferred in a valid power of attorney, it certainly should use the same diligence in an IRA transaction with an agent as with the principal. For example, if an agent requests an IRA distribution, the financial organization should require proper identification and documentation before the transaction takes place. In situations requiring greater scrutiny, the financial organization should follow established guidelines, or it should refer the matter to legal counsel for a determination of proper procedure.

Many states give financial organizations protection from liability when they rely on a facially valid power of attorney. Otherwise, these organizations may be reluctant to deal with anyone other than the principal, which would undermine the very reason for the power of attorney. Sometimes financial organizations require a signature by the attorney-in-fact, which attests to the attorney-in-fact’s belief that the power of attorney is still valid.

Whether dealing with a principal or an agent, financial organizations are under an affirmative duty to ensure that investments are protected and that transactions are properly conducted. The surest way to guarantee that this is done is to obtain and follow the direction of legal counsel familiar with individual state requirements.

Before acting upon the direction of an individual with a power of attorney, a financial organization may wish to take the following steps.

1. Ask to see the original signed POA document. If it contains the principal’s original signature, the notary’s original signature, and the notary seal, make a copy of the document.

2. Check the POA’s scope of authority to determine whether it authorizes the attorney-in-fact to perform the requested IRA transaction.

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3. Check the identity of the attorney-in-fact to verify that the individual is named in the POA as the attorney-in-fact.

4. Present the document to the financial organization’s attorney, or ask the attorney to devise a set of guidelines to be followed when dealing with powers of attorney.

Guardianship

A guardian is a person appointed by a court who is responsible for taking care of and managing the person and the property of an individual (sometimes called a ward) who, by reason of mental or physical health, is considered by the court to be incapable of administering his own affairs.

In its order appointing the guardian, a court generally will outline the responsibilities that the guardian will assume. A court may limit the guardian’s powers to handling only the property of an individual or may extend the powers to require the guardian to make decisions regarding the residence and care of the ward. An individual who has less than full control over both the person and the property is sometimes referred to as a “conservator.”

A guardianship relationship is very different from the relationship created by a power of attorney. Under a power of attorney, the grantor decides who will make decisions regarding her property and the scope of the attorney-in-fact’s authority. A nondurable power of attorney will terminate if the person becomes incapacitated. A guardian, on the other hand, is appointed by a court—usually because the person has become incapacitated. And the court decides what powers the guardian can properly exercise.

The requirements for guardianship proceedings and for the form of the orders appointing the guardian will differ from state to state. The scope of the guardianship appointment will also differ from case to case. A financial organization’s attorney can point out any special concerns to watch for under a particular state’s laws.

If an IRA owner becomes subject to guardianship, the financial organization may be called upon to follow the directions of the guardian regarding the IRA owner’s assets. If the financial organization learns that an IRA owner has become the subject of guardianship or conservatorship proceedings, the financial organization should take the following steps.

1. Ask for a certified copy of or the original signed order appointing the conservator or guardian. Make a copy of the document to keep on file. If questioning the authenticity of the order, check with the clerk of court.

2. Check the order’s scope of authority to determine whether it authorizes the conservator or guardian to perform the requested IRA transaction.

3. Check the identity of the conservator or guardian to verify that the individual named in the order is the conservator or guardian.

4. Present the document to the financial organization’s attorney to determine whether the conservator or guardian has the power to direct contributions, distributions, or other transactions with respect to the IRA. As an alternative to submitting each order to its attorney for review, the financial organization could obtain guidelines from the attorney to be followed under a guardianship order.

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Creditors of IRAs

Financial organizations generally should distribute IRA assets only according to instructions from the IRA owner (or power of attorney or guardian, as applicable). There may be exceptions to this rule, however.

General CreditorsWhether an IRA is exempt from seizure by judgment creditors typically is a question of state law. Some states will specifically exempt various types of retirement plans from seizure by general creditors. But most permit judgment creditors (those having a legal right to enforce execution of a court order) to seize IRA assets to satisfy the judgment. The procedures for executing on a claim generally are stated in state statutes.

A trust generally is not beyond the reach of a creditor unless the trust is a spendthrift trust. A spendthrift trust is a trust created to provide for the maintenance of a beneficiary, and not for the benefit of the person who establishes the trust. An IRA generally has been determined not to be a spendthrift trust because

• an IRA may be revoked at any time by the IRA owner,

• an IRA is really for the benefit of the grantor (IRA owner),

• an IRA remains subject to the IRA owner’s exclusive control, and

• the grantor has the choice whether to actually participate in the account by choosing whether to make a contribution each year.

A financial organization should follow certain procedures if a creditor attempts to seize (levy) IRA assets.

1. Obtain a copy of the levy notice or execution of judgment from the creditor. State law will dictate the documentation the creditor must present and the procedures that must be followed.

2. Submit each document to your attorney for review, or have your financial organization’s attorney draft guidelines to be followed when a creditor attempts to enforce a judgment against an IRA owner.

The IRS as CreditorThe IRS is authorized by Congress to act as the tax collecting arm of the federal government. By statute, the IRS may levy upon IRAs, but only after these three requirements are met.

• The IRS assessed the tax and sent the taxpayer a Notice of Demand for Payment.

• The taxpayer neglected or refused to pay the tax.

• The IRS sent a Final Notice of Intent to Levy and a Notice of Your Right to a Hearing at least 30 days before the levy.

Should the IRS decide to levy against an IRA, the financial organization generally will receive a Notice of Levy from the IRS. For the levy to apply to an IRA, an IRS representative must sign a specific section in the levy notice. Therefore, a financial organization should check the notice to make certain that the levy applies to the IRA.

If the financial organization honors the levy, it is discharged from any obligation or liability to the taxpayer (IRA owner) with respect to surrendering or paying IRA assets pursuant to the levy. If, on the other hand, the financial organization refuses to honor a levy, the financial organization will be liable for the payment to the federal government.

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If a financial organization receives a levy from the IRS on a retirement plan, the following steps are required.

1. Freeze the account.

2. Remit payment to the IRS within the specified time.

Many IRA owners not wishing to have their IRA assets subject to the levy often come up with other non-IRA property to pay their tax bills. The IRS also has indicated that levies will wrongly be executed against IRAs only if other assets are unavailable to satisfy the claim.

If the IRS chooses to use IRA assets to satisfy a tax lien, the payment from the IRA is considered a distribution for federal income tax purposes and the distribution is subject to federal income tax withholding. Thus, the IRA owner will be liable for any income tax owed on the amount used to satisfy the lien. Distributions because of IRS levies are exempt from the 10 percent early distribution penalty tax.

Whether a local tax authority may levy or otherwise obtain the assets of an IRA is controlled by state law. Financial organizations should consult with their legal counsel to determine if state or local tax authorities may levy on IRAs.

Financial Organization’s Right of Set-OffIf an IRA owner owes money to a financial organization (for example, an IRA owner has defaulted on a loan), the financial organization may be inclined to remove IRA assets to satisfy the debt. This is known as a set-off (or offset).

A financial organization’s right of set-off generally is dictated by state law. Three elements usually are required for a set-off to occur.

1. A valid debtor-creditor relationship exists between the financial organization and the IRA owner.

2. The account being used to set off a debt is one held solely by the debtors.

3. The debt must be mature.

The few state courts that have considered the issue have concluded that an IRA is a “special deposit” creating a trust between the financial organization and the debtor, and is not subject to set-off.

If the law in your state permits IRAs to be used to offset other debts at a financial organization, consult with your attorney to determine the procedures to follow. These procedures may be similar to the procedures followed by general creditors in executing on a judgment.

Bankruptcy Protection for IRAsThe Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 provided, among other things, new protections for IRA assets. Effective April 20, 2005, the Act allows debtors to claim an exemption from including qualifying assets in their bankruptcy estates. These protections generally apply to assets in IRAs (Traditional and Roth), and to most employer-sponsored retirement plans, including savings incentive match plans for employees of small employers (SIMPLE) IRA plans and simplified employee pension (SEP) plans. In addition, qualifying retirement plan assets rolled over to IRAs also may be claimed exempt by debtors.

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The Bankruptcy Act generally provides the following exemptions related to IRAs.

• Traditional and Roth IRA assets may be exempted from a debtor’s bankruptcy estate up to a maximum of $1 million, subject to adjustments based on the Consumer Price Index (CPI) every three years. As announced in the Federal Register on February 22, 2016, this amount has been adjusted to $1,283,025, effective April 1, 2016.

• SEP, SIMPLE IRA, and other retirement plan assets may be exempted and are not subject to a maximum amount.

• Assets rolled over to IRAs from employer-sponsored retirement plans (including SEP and SIMPLE IRA plans) may be exempted and are not subject to a maximum amount.

The U.S. Supreme Court ruled unanimously in Clark v. Rameker in June 2014, that IRA assets inherited by a nonspouse beneficiary are not to be considered retirement assets, and therefore are not exempt from a nonspouse beneficiary’s bankruptcy estate. The ruling settles an issue on which different courts of appeal have previously handed down differing opinions with respect to inherited IRAs.

Bankruptcy is a complicated legal issue. IRA owners should be advised to seek legal counsel for such matters.

Investment Protection for IRAs

The following agencies provide some protection upon financial organization failure for certain types of investments, including those purchased with IRA assets.

Federal Deposit Insurance Corporation CoverageThe Federal Deposit Insurance Corporation (FDIC) protects customers of FDIC-insured banks and savings associations (thrifts) against loss if an FDIC-insured financial institution fails. The FDIC generally insures time deposits (e.g., CDs) and other interest-bearing deposit accounts and investments. The FDIC insurance coverage generally is dollar-for-dollar up to $250,000 (adjusted for cost-of-living every five years) per depositor, per bank, for each “ownership category.” Covered investments in IRAs fall under the ownership category called “Certain Retirement Accounts.”

A beneficial interest in an inherited IRA is insured separately from all other IRAs maintained at the same financial organization. But if a spouse beneficiary treats inherited IRA assets as her own, they will be aggregated with the other assets she owns for purposes of coverage.

More information on FDIC insurance can be obtained from the FDIC website or by contacting the FDIC directly.

National Credit Union Insurance CoverageThe National Credit Union Administration (NCUA) operates the National Credit Union Share Insurance Fund (NCUSIF), which insures assets in IRAs and other retirement accounts that an individual has at a federally chartered credit union. An individual must be a member of the credit union to obtain the insurance benefits. NCUA insurance coverage generally follows the same rules as FDIC coverage.

The standard share insurance amount is $250,000 per share owner, per insured credit union, for each account ownership category.

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An IRA in which an individual has a beneficial interest is insured separately from all other IRAs he maintains at the same credit union. But if a spouse beneficiary treats inherited IRA assets as her own, they will be aggregated with her other IRA assets for purposes of the coverage limitation.

More information on share insurance can be obtained from the NCUA website or by contacting the NCUA directly.

Securities Investor Protection CorporationThe Securities Investor Protection Corporation (SIPC) offers some protection to clients of SIPC-member brokerage firms (generally referred to as broker-dealers) to restore missing securities (e.g., stocks, bonds, and other securities). The SIPC works to restore funds to investors who have certain missing assets with troubled broker-dealers that are members of the SIPC and are registered with the Securities and Exchange Commission (SEC). SIPC helps individuals whose money, stocks, and other securities are stolen or are put at risk when a broker-dealer fails. SIPC does not provide blanket coverage and does not protect investments in the same way that the FDIC does.

The SIPC generally works with a court-appointed trustee that manages the liquidation of the troubled firm. Clients first get back the actual stock or other securities that are registered in their names, if possible. Then the SIPC works to restore additional missing assets using the firm’s customer account balances or SIPC reserve funds with certain ceilings in place (generally $500,000 per client, with a maximum of $250,000 for cash claims).

Certain individuals are not eligible for SIPC protection (e.g., beneficial owners, partners, officers, managers). More information on SIPC coverage is available at the SIPC website or by contacting the SIPC directly.

Community and Marital Property

In some states, property acquired during the marriage or with marital assets is deemed to be “community” or “marital” property. That is, the property is owned jointly by both spouses, even if purchased with the wages or other income of only one of the spouses. As with other issues involving families or marriage, state law determines whether a state follows principles of community or marital property.

Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington. Wisconsin’s Marital Property Act also is based on key community property principles. Alaska has adopted community property laws, but the married couple must choose to have these laws apply.

When the community property rules apply, a spouse may automatically possess an interest in the IRA of the other spouse. An IRA owner may not circumvent this ownership right by naming an individual other than the spouse as the beneficiary without the spouse’s consent.

IRA owners should be referred to tax professionals who can assist in examining the financial or legal effect of the community or marital property rules on their IRA. Financial organizations should, in all cases, avoid giving financial or legal advice in this area. Careful presentation of the spousal waiver language in the beneficiary designation form and referrals to tax professionals should help financial organizations avoid problems.

If either the IRA or the IRA owner’s residence is located in a community property state, the IRA owner’s spouse generally should consent, in writing, if the IRA owner names a primary beneficiary other than the spouse. The consenting spouse’s signature should be witnessed to avoid any dispute regarding consent.

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Transfers Incident to Divorce or Legal Separation

As the popularity and size of IRAs grows, IRAs are increasingly the subject of property dispositions in divorce or legal separation proceedings. Consequently, when a divorce or legal separation occurs, retirement plan arrangements, including IRAs, generally are subject to a property division according to the terms of the divorce decree or legal separation instrument (referred to here as “divorce decree”).

Typically, a divorce decree will address the allocation of IRA assets to the original IRA owner’s former or legally separated spouse (referred to here as “former spouse”) in one of two ways.

1. The legal document will award the former spouse all or a portion of the IRA assets without specifically designating how the transfer of ownership is to be accomplished.

2. The legal document will allow the former spouse to transfer all or a portion of the IRA assets into an IRA of her own.

Distribution to Former SpouseThe IRS informally has verified that if IRA assets are distributed directly to a former spouse who has been awarded all or a portion of an IRA owner’s IRA, the former spouse will be responsible for the taxation of the assets unless the divorce decree states otherwise. Therefore, in situations where the divorce decree calls for a distribution to a former spouse, or in situations where the decree is silent on the issue of how to handle the transaction and the former spouse elects a distribution, the IRA administrator generally should make a check payable to or distribute the property directly to the former spouse. The financial organization should report the distribution to the IRS on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., in the distribution recipient’s (i.e., the former spouse’s) name and Social Security number.

The appropriate distribution codes to use in Box 7 in this situation are not specifically addressed in the instructions to Form 1099-R. Financial organizations should report the distribution reason code that normally would apply to the recipient—generally code 1 or 7 for Traditional IRAs, or code J, Q, or T for Roth IRAs. If using code Q for a Roth IRA qualified distribution, the IRA administrator may want to obtain a certification form and withdrawal statement on which the distribution recipient certifies that the distribution is indeed qualified. (See Chapter 4, IRA Reporting, for more information on reporting distributions.)

When an IRA administrator makes an IRA distribution because of divorce or legal separation, he generally should retain a withdrawal form (completed by the recipient), including a withholding notice and election, to gather information for reporting the distribution on Form 1099-R and to prove that the proper withholding requirements have been met.

Once the former spouse receives a distribution of the IRA assets, he generally should receive a Form 1099-R reflecting the transaction and should report the receipt of the assets on his Form 1040, U.S. Individual Income Tax Return.

These provisions apply when a former spouse is awarded all or a portion of the IRA assets. If the IRA owner takes a distribution of IRA assets to meet a financial obligation (not specific to the IRA) resulting from a divorce settlement, the IRA owner is responsible for any penalties and taxes that may result from the distribution.

Transfer to Former SpouseThe conventional method for moving IRA assets from the IRA owner to the former spouse is a transfer. There are two commonly used methods of transferring IRA assets to a spouse or former spouse, as outlined in IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs).

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The methods are

• changing the name on the IRA, or

• transferring the IRA assets to an IRA in the spouse’s name.

In cases where the divorce decree specifically calls for a transfer of assets to an IRA in a former spouse’s name, an IRA-to-IRA transfer is appropriate. But in situations where the divorce decree is silent on how the transfer of assets must occur (a distribution or transfer), the financial organization should exercise caution. Until the IRS issues definitive guidance, the financial organization must, in conjunction with the IRA owner or recipient, make a business decision on how to handle the division. Following are some possible actions to consider.

1. Request that the IRA owner and former spouse amend the divorce decree or separation agreement, if practical. Many times, the parties involved will want to avoid the additional time and expense that this option could involve.

2. Obtain the consent of the parties (or their attorneys), and transfer the applicable portion of the IRA to a separate IRA established for the spouse or former spouse.

3. Obtain a written signed statement acknowledging that the financial organization has informed the recipient of the options and that the recipient will not blame the financial organization if the IRS disallows the transactions (a “hold harmless” agreement).

In no event, however, may the resulting transaction be contrary to the terms of the divorce decree or separation agreement. The parties should rely on their attorneys to determine that the proper documents have been executed, and financial organizations should not offer advice on this issue.

Administrative ProceduresRegardless of whether an IRA administrator is distributing assets directly to a former spouse or conducting an IRA-to-IRA transfer, certain precautionary steps should be taken. The IRA administrator should retain a copy of the portion of the legal documents specifically directing the transfer of interest in the IRA in the IRA owner’s file. In addition, the IRA administrator should have either a withdrawal statement or a transfer request form (as applicable, depending upon how the transaction is being handled) completed.

The IRA administrator should read the legal document carefully to note the amount awarded to the former spouse, the timing of the award, and other information pertinent to the transfer of interest. An IRA administrator may wish to refer any questions about the legal document to the financial organization’s attorney for interpretation.

Rollovers Incident to Divorce or Legal SeparationIf the divorce decree so directs, ex-spouses may transfer IRA assets received in a divorce settlement or legal separation to an IRA. The issue of rolling over these assets is somewhat unclear, although oral guidance from the IRS indicates rollovers of such assets may be possible.

The language in the divorce decree or separation agreement must first be reviewed to determine whether a directive for the IRA assets is indicated. If the divorce decree does not specify how the distribution or transfer of assets is to take place, the best alternative is to have the divorce degree or separation agreement amended to specify how this transaction must take place.

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IRS Publication 590-A indicates the two common methods of transferring IRA assets to a former spouse are changing the name on the IRA or making a direct transfer. Although rollovers were included in an earlier version (1993) of Publication 590, Individual Retirement Arrangements (IRAs), as a method of “transferring” IRA assets because of divorce, Publication 590-A no longer addresses rollovers as an option. But if interpreting the reference in Publication 590-A of “common methods of transferring IRA assets” in a broad sense, the rules may leave room for rollovers of assets from IRA to IRA. Publication 590-A does provide rollover guidance relating to qualified retirement plan distributions because of divorce.

If a distribution is given directly to the ex-spouse or legally separated spouse pursuant to a divorce decree or separation agreement, the financial organization should generate a corresponding Form 1099-R in the recipient’s name. The distribution would then be eligible for rollover, provided all the rollover rules were met. Financial organizations that choose to allow rollovers in such situations may wish to obtain a written, signed statement or a hold harmless agreement acknowledging that the financial organization informed the individual of his options and that the client will not blame the organization if the IRS disallows the transaction.

Effect of Qualified Domestic Relations Orders on IRAsQualified domestic relations orders (QDROs), by definition, apply only to certain employer-sponsored retirement plans—not to IRAs. However, QDROs sometimes address IRA asset disposition. A former spouse who receives a distribution of retirement plan assets because of a QDRO may roll over that distribution into an IRA or other eligible retirement plan.

If a financial organization is informed that an individual is receiving a distribution pursuant to a QDRO and wishes to roll over that amount to an IRA, the financial organization should follow these procedures.

1. Verify that the individual is the plan participant’s former spouse.

2. Obtain certification from the IRA owner that the deposit is eligible to be rolled over. (This can be done on a contribution eligibility form or simply in the form of a statement prepared by the financial organization that the IRA owner signs. See “Hold Harmless Language” later in this chapter.)

Beneficiary Issues

Trust as IRA BeneficiaryAn IRA owner may wish to name a trust as his IRA beneficiary. A trust is an arrangement in which one individual or entity takes possession and title to property and holds it for the benefit of another.

The trust is named as beneficiary primarily for two purposes. First, the trust allows the IRA owner to exercise greater control over how the money will be distributed upon her death. For example, if an IRA owner wished to name a grandchild as an IRA beneficiary but did not want the child to receive the assets until she became an adult, a trust could be used to accomplish this purpose. The second reason for establishing a trust as beneficiary is to avoid certain estate tax problems that may arise upon the IRA owner’s death.

If a trust is named as an IRA beneficiary, the financial organization should take the following steps to ensure the proper payout of benefits.

1. Obtain a copy of the relevant portions of the document creating the trust. At a minimum, determine the trustee of the trust.

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2. Submit the trust document to the financial organization’s attorney to ensure that the trust is in existence and to verify the proper payout method under the trust. As an alternative to submitting each trust document to the financial organization’s attorney, the attorney may choose to prepare written guidelines.

3. Make all checks payable to the trust using its proper name and tax identification number.

4. Refer all questions concerning establishing the trust and the tax consequences of such a trust arrangement to the individual’s tax advisor or attorney.

If certain requirements are met, an IRA owner may name a trust as beneficiary, and “look through” to use the underlying beneficiary of the trust as the designated beneficiary for calculating required minimum distributions (Treas. Reg. 1.401(a)(9)-4, Q&A 6 (b)). The trust must

• be valid under state law,

• be irrevocable or become irrevocable upon the individual’s death, and

• have identifiable beneficiaries listed.

The financial organization must receive either a copy of the trust instrument or qualifying documentation of the trust by October 31 of the year following the year of the IRA owner’s death. The documentation also must show who the beneficiaries are as of September 30 of the year following the year of death (Treas. Reg. 1.401(a)(9)-4, Q&A 6).

No Beneficiary Listed for IRASome IRA owners may fail to name a beneficiary before death. In those cases, the following guidance should help in determining how the IRA assets are to be paid out.

• Check the IRA plan default provisions. Most IRA plan agreements provide for payment of IRA assets in the event no beneficiary is named. Some default to the surviving spouse (if any); others provide for payment to the decedent’s estate.

• If there is no plan provision specifying a beneficiary, the individual’s estate generally is deemed to be the beneficiary of the IRA proceeds under state law. State law also will dictate the portion that surviving beneficiaries will receive, based on their relationship to the IRA owner (assuming that the IRA owner does not have a will).

If an IRA has not been claimed within the period provided for under state unclaimed property laws, check with the financial organization’s attorney to assess what steps need to be followed to properly transfer the assets to the state. As an alternative, the financial organization’s attorney may wish to provide written guidelines that should be adhered to in such cases.

Beneficiary DisclaimerIRC Sec. 2518 states that an individual may disclaim a whole or partial interest in property and then be treated as though she never had rights to that property. As a result, the disclaimant also will be relieved of the associated tax consequences of receiving the disclaimed property and subsequently giving it away. In 1991, the IRS issued General Counsel Memorandum 39858, which confirmed that IRC Sec. 2518 may be applied to IRAs. A disclaimer does not, however, simply allow a beneficiary to forgo taking distributions for a given period of time—it is permanent. When the disclaimer rules are applied to an IRA, the disclaimant is treated as though she was not the beneficiary as of the IRA owner’s date of death. In essence, the beneficiary is treated as though she predeceased the IRA owner.

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Disclaimers may be made by individuals who do not want the extra tax burden that results from including beneficiary distributions in income. Others choose to disclaim a beneficial interest in IRAs so that other individuals will receive the benefit. For example, a primary spouse beneficiary may disclaim her interest in an IRA so that a child who is the contingent beneficiary will receive the proceeds. The beneficiary may not choose who eventually will receive the IRA proceeds.

NOTE: This information deals with disclaimers and federal tax consequences. Financial organizations should consult with legal counsel to determine how state law may affect disclaimers.

Identifying a Valid DisclaimerAlthough the financial organizations do not assist in the execution of the disclaimer, IRA administrators must understand the basic elements of a disclaimer. They should refrain from accepting and acting on disclaimers without first determining the validity of the disclaimer because the execution of a disclaimer involves tax consequences for the beneficiary.

Decisions such as who will review the disclaimer and what process should be followed in reviewing the disclaimer generally involve consulting an organization’s attorney or following a set of guidelines dictated by an attorney. Whether an attorney or financial organization reviews the disclaimer, the following elements should be considered when it is presented. If the disclaimer is not valid, the disclaimant may be subject to income and gift taxes.

• A disclaimer must be a written, irrevocable refusal to accept interest in the given property, made by the disclaimant or the disclaimant’s representative.

• A written disclaimer of interest in an IRA must be delivered to the financial organization within nine months from the date of the IRA owner’s death, or if later, nine months from the date the individual turns 21.

• If a succeeding beneficiary (someone who becomes the beneficiary as the result of the disclaimer) also makes a disclaimer, it also must be made within nine months of the later of the date of death or the date on which the individual turns 21. Because the first disclaimer is retroactive to the date of death, the original nine-month time frame also will apply to the successor beneficiary.

• An IRA owner may not accept any of the disclaimed IRA assets or any of its benefits (e.g., the interest allocable) before executing the disclaimer. This does not prevent an individual from disclaiming a partial interest and accepting the portion not disclaimed.

• Finally, the disclaimant may not exercise any power to determine who will receive the disclaimed interest. The IRA assets must pass on without any direction, generally to a person other than the disclaimant. For instance, a disclaimer cannot instruct a financial organization to pass on the proceeds to a designated individual or entity. The disclaimer must be unconditional. A disclaimant may not retain unlimited power to control the redistribution of the disclaimed IRA proceeds. But, the disclaimant may retain power to make distributions after making the disclaimer if the scope of the powers are limited and defined. For example, assume a disclaimer results in IRA proceeds being distributed to a trust. The disclaimant is a trustee for the trust and has the power to make distributions, but only for the purpose of paying the educational expenses for the deceased IRA owner’s children. The disclaimer would be valid because the disclaimant’s power is limited to an ascertainable standard (Treas. Reg. 25.2518-2(e)).

When a trust or estate is named as the beneficiary and those individuals that benefit from the arrangement choose to disclaim an interest in an IRA, each of those individuals must make a disclaimer. A collective disclaimer made by an executor on behalf of the estate, for example, would not be valid because the executor represents the estate, not those that benefit from it (Private Letter Ruling 9437042).

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Identifying Successor BeneficiariesTo determine who replaces the disclaimant, a financial organization should use the same process that is used when a beneficiary predeceases an IRA owner. For example, if a sole primary beneficiary disclaims an interest, the contingent beneficiary generally will take the disclaiming beneficiary’s place as the primary beneficiary. If the sole contingent beneficiary in turn disclaims her rights, the IRA proceeds will then be distributed according to the provisions of the given plan. Typically, IRA plan agreement default provisions provide that the estate becomes the beneficiary if a beneficiary is not named. Note that some plan defaults may have other provisions for determining the beneficiary when one is not named.

Under the distribution regulations, the designated beneficiary is determined as of September 30 of the year following the year of the IRA owner’s death (Treas. Reg. 1.401(a)(9)-4, Q&A 4). Therefore, financial organizations may only disregard beneficiaries who take a complete distribution or disclaim their share during the period between the IRA owners’ death and September 30 of the year following the year of death.

Partial DisclaimersA beneficiary may disclaim a partial interest in an IRA if he follows additional requirements. If the assets within an IRA can be divided into separate investments, such as stocks, a specified portion of the assets may be disclaimed. The disclaimer in this situation should specifically identify the assets disclaimed (Treas. Reg. 25.2518-3(a)(1)(ii)).

If a disclaimer of an undivided portion of assets is made, the disclaimed portion must consist of the same percentage of each investment within the IRA. For example, assume a beneficiary disclaims 50 percent of an IRA owner’s balance. If the account has two investments, a certificate of deposit valued at $9,000 and another certificate worth $4,000, the disclaimant will be entitled to 50 percent of each certificate as well as any attributable earnings. If the disclaimant does not take an immediate distribution, the principal and earnings of the disclaimed share must be tracked through separate accounting (Treas. Reg. 25.2518-3(b)).

Revenue Ruling 2005-36As noted, an IRA owner may take a partial distribution of her portion of the inherited IRA, and disclaim other portions if disclaimed by the applicable deadline (IRC Sec. 2518(c)(1)). The IRS issued Revenue Ruling (Rev. Rul.) 2005-36, clarifying that if certain conditions are satisfied, a beneficiary can receive the deceased IRA owner’s year-of-death required minimum distribution (RMD) and can thereafter make a qualified disclaimer. After receiving the year-of-death RMD, a beneficiary may make a qualified disclaimer with respect to all or a portion of the balance if she also distributes or segregates in a separate account the income attributable to the RMD and any other portion not disclaimed. As defined in Rev. Rul. 2005-36, the income attributable may be calculated as follows:

Disclaimant’s total amount of distributions from the bequest X Total income earned by the bequest from ––––––––––––––––––––––––––––––––– date of death to date of disclaimer

FMV of bequest on the date of death

Rev. Rul. 2005-36 further states that after disclaiming the eligible assets, if the beneficiary has not distributed the segregated income by September 30 of the year following the IRA owner’s death, she will be considered a designated beneficiary. This would be taken into account when looking at eligible distribution options for remaining beneficiaries.

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Probate DisputesFrom time to time, a financial organization will learn that family members or other individuals intend to challenge the beneficiary designation of the plan. In other cases, there may be a dispute between the various beneficiaries as to the portion of the balance that they are to receive. In such cases, the beneficiary designation under the IRA generally will control. Other legal instruments, however, such as a will drafted later in time, may supersede the beneficiary designation.

If a financial organization learns that there is a dispute as to the right to receive the assets under the plan, the matter should be immediately referred to the financial organization’s attorney. The attorney will be in a far better position to assess the source of the dispute and the effect of any other documents that may be involved.

Before a lawsuit is commenced, the adverse parties may be convinced that the effort and expense of legal action may be counterproductive, particularly if the legal costs of the financial organization are paid from IRA assets. Once a legal claim is filed, the financial organization typically will be named as a party to the lawsuit through a process called “interpleader.” In this type of suit, the financial organization, which has no legal claim to or interest in the IRA assets, seeks a court determination regarding payment to the proper party.

Missing IRA Owners and Beneficiaries

Most financial organizations are faced at some point with the task of locating missing IRA owners or beneficiaries. The problem most frequently arises when the missing IRA owner reaches age 70½ and must begin receiving RMDs or when payouts are required to a beneficiary under IRC Sec. 401(a)(9). An IRA owner who fails to take a required minimum distribution is subject to a 50 percent excess accumulation penalty tax on the amount that should have been distributed.

Locating MechanismsFinancial organizations should consider the following methods of locating missing IRA owners or beneficiaries.

• Sending correspondence by certified mail, return receipt requested, to the last known address

• Contacting other possible resources such as family members, friends, or subsequent employers

• Using Internet search tools

• Contacting credit reporting agencies

• Using commercial locator services

Many IRA owners and beneficiaries can be located by financial organizations that exercise creative tracking techniques, such as gathering information from co-workers or family members. If these initial efforts fail, financial organizations may want to consider using a commercial locator service. Whether the locator’s fees will warrant using this method depends on the IRA balance. These fees typically could be assessed against the IRA balance.

Financial organizations should always keep detailed records of their efforts to locate missing individuals to demonstrate that they have taken all reasonable steps to properly distribute the IRA assets.

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Abandoned IRAs

Many financial organizations struggle with IRAs that are left unclaimed or abandoned. How must these IRAs or other assets be handled to satisfy both a financial organization’s duty as trustee or custodian and its desire to clean up inactive accounts? In the United States, the doctrine of escheat grants individual states sovereign rights to abandoned property. Gradually, the states have developed laws that have extended the doctrine of escheat to cover all types of property (not just real estate) that is presumed abandoned.

Because conflicts sometimes developed as a result of differing state laws, a national commission drafted the 1981 Uniform Unclaimed Property Act (the Act) (which was modified in 1995). Since it was passed, most states have adopted statutes patterned after the Act. The remainder of states have developed legislation to address the disposition of unclaimed property, but may have relied on the general principles contained in the Act rather than on its specific language.

The Act has helped take the guesswork out of determining when property is presumed abandoned. This act is a “model” act, serving as a guide for the drafters of individual state statutes. Variations may occur from state to state. Some states have shortened the time that holders of abandoned property must wait before reporting or turning over the property. Other states may have escheat laws or banking statutes that lengthen waiting periods for IRAs, or that begin the waiting period after the IRA owner turns 70½. Consequently, each financial organization should determine how any relevant state law mandates the treatment of abandoned property. Legal counsel should be consulted to provide specific procedures to properly report and pay over unclaimed accounts. The abandoned property rules discussed here also apply to Roth IRAs.

Identifying Abandoned IRAsSection 2 of the Act gives guidance regarding when IRAs or other bank deposits in financial organizations are presumed abandoned. Accounts generally are presumed abandoned if the owner has not communicated an interest in the account after three years following the date distributions are required to begin.

Locating Missing IRA OwnersFinancial organizations must annually report accounts or funds presumed to be abandoned under the Act to the state administrator or treasurer. Before this is done, however, the financial organization must again attempt to tell the apparent owner (at her last known address) that it holds the property. Locating missing IRA owners or beneficiaries may require a variety of creative methods. (See the preceding section “Missing IRA Owners and Beneficiaries.”) Financial organizations should keep detailed records of their efforts to locate missing IRA owners or beneficiaries. Section 20 of the Act provides that if the recordkeeping meets “reasonable commercial standards of practice in the industry,” the state will indemnify the financial organization if unclaimed funds are remitted to the state.

Reporting Abandoned IRAsIf locating efforts fail, the financial organization must file a report with the state. Individual state law prescribes what information financial organizations must include. This report is generally due before November 1 of each year, reflecting property presumed abandoned as of June 30 of the same year.

Later in the year the state will publish a notice titled “Notice of Names of Persons Appearing to be Owners of Abandoned Property.” This notice appears in a newspaper circulating in the county that contains the IRA owner’s last known address and reveals information about when and how property may be claimed. Additionally, the state must again mail a notice to each missing IRA owner whose last known address is listed in the report.

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Forfeitability of IRAsArticle II of the IRS Model IRA plan agreement states that the depositor’s interest in the IRA balance is nonforfeitable. IRS regulations give little guidance about relinquishing IRAs under escheat laws, but Treas. Reg. 1.411(a)-4(b)(6) states that “a benefit which is lost by reason of escheat under applicable state law is not treated as a forfeiture.” Although this section pertains to qualified plans, numerous court decisions have indicated that IRA assets generally enjoy even less protection than qualified plan assets. Therefore, it seems reasonable to infer that financial organizations may pay over abandoned IRA assets to the state without violating IRS provisions.

Paying Unclaimed IRAs to the StateThe Act states that, within six months after the final date for filing the report, all abandoned property required to be reported must be paid or delivered to the state administrator (or treasurer). The financial organization generally should complete and retain a withdrawal statement, detailing the reason for the distribution. Section 20 of the Act states:

(a) Upon the payment or delivery of property to the administrator, the state assumes custody and responsibility for the safe-keeping of the property. A person who pays or delivers property to the administrator in good faith is relieved of all liability to the extent of the value of the property paid or delivered for any claim then existing or which thereafter may arise or be made in respect to the property.

In most states, the government takes custody, not title, of the property. In other words, the state does not actually own the IRA or other property, but rather safeguards it until the rightful owner claims it. Under the Act, the state waits three years, then sells the property (if other than cash) to the highest bidder at a public sale. If an apparent owner subsequently makes a proper claim to the IRA, the state generally will pay over or deliver the IRA to the claimant.

Although the Act protects financial organizations that pay over abandoned property in good faith, it also provides for criminal penalties for persons who willfully violate the Act. Failure to report abandoned property is punishable as a misdemeanor-level offense. Failure to pay or deliver the property to the state is a gross misdemeanor offense.

Reporting and Withholding for Abandoned IRAsThe IRS has not clearly addressed how financial organizations should report IRAs that they escheat to the state. Absent clear guidance otherwise, conservatively, Ascensus recommends that the financial organization report the distribution to the IRS in the IRA owner’s name and Social Security number on Form 1099-R.

Similarly, federal income tax withholding for a distribution of an unclaimed IRA has not been specifically addressed by the IRS. Informal guidance by the IRS suggests that a financial organization may satisfy the withholding notice requirement (under IRC Sec. 3405(e)(10)) by giving the state the withholding notice. The IRS indicated that this would fulfill the financial organization’s obligation to give withholding notice, but it remains uncertain whether the state may waive withholding on behalf of the IRA owner. Conservatively, normal withholding rules would apply when the distribution is reported in the IRA owner’s name and Social Security number.

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Small Estate Administration

For many individuals, a significant portion of their estates may consist of retirement plan assets. Generally IRA owners or plan participants are careful to name specific beneficiaries to inherit these assets. Sometimes, however, either by positive election or document default, an estate is the beneficiary of the assets. Large estates may navigate a labyrinth of laws to get through probate. Small estates may be able to avoid the time and expense of probate using the small estate administration procedures specific to each state.

Small Estate RequirementsThe opportunity to use small estate administration depends upon the value of the personal and real property of the deceased individual. Each state has its own limitations that have to be met, including timing requirements.

Small Estate ProceduresIf the estate meets the requirements, each state will have a specific procedure to allow the dispersal of assets. Some of those procedures include allowing for a small estate affidavit to handle the assets, appointing a voluntary administrator/personal representative to manage the disposition of assets, or providing for a summary administration of the assets.

Transfer on Death DeedThe transfer on death deed (TODD) is another legal option that an individual can employ to keep real estate from going through the probate process and to increase the likelihood of qualifying for a small estate administration. In states that authorize TODDs, a property owner may transfer the ownership of real property directly to a named beneficiary upon the owner’s death (and production of proper documentation) by implementing a TODD. The TODD itself does not give the beneficiary any use of or control over the property until the death occurs.

As with most estate issues, state law governs whether a TODD may be used and, if so, what it must contain.

Minors as IRA Owners

The Internal Revenue Code and related regulations contain no minimum age requirement for an IRA owner. Therefore, under federal law, even children with earned income may establish an IRA. When an individual establishes an IRA, he is entering into a contract with the financial organization. The terms of the IRA plan agreement essentially are the terms of the contract. In most states, there are restrictions on the ability of a minor, that is a person under legal age, to enter into a valid contract. In some states, a contract requires a co-signature of a parent or legal guardian. In many states, the parent automatically is the guardian for handling the affairs of a child. Regulations governing the particular financial organization may place further restrictions on the ability of the minor to select certain investments or to establish a relationship with the financial organization.

A financial organization should meet with its attorney and establish procedures to be followed whenever a minor opens an IRA. These procedures should follow the format used when minors open other types of accounts at the financial organization. If an adult is co-signing the documents of the minor, the adult’s signature, along with her relationship to the child, should clearly appear on each of the forms.

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Mergers and Acquisitions

In today’s financial market, many financial organizations are experiencing changes in their legal structures. Financially sound organizations are purchasing or merging with other organizations. Organizations that have failed are being taken over by other financial organizations. These and other changes in ownership may have a significant effect on IRAs held at the financial organizations.

The Internal Revenue Code describes the entities able to act as trustee or custodian of an IRA. When entities merge or are purchased by other organizations, the original entities no longer have a legal existence. If the former entities acted as trustee or custodian of the financial organization’s IRAs, a new entity will assume those powers.

The new financial organization may have different investment options available to its IRA clients than the former financial organization. Procedures for handling contributions, distributions, etc., also may vary between the entities.

The former financial organization must carefully preserve IRA data so proper IRS reporting occurs.

Notify the clients of the changes, such as those noted next.

• Provide notice of the change in trustee, custodian, or issuer.

• Review IRAs with the assistance of the financial organization’s legal counsel to assess the need for

– amendments to update the plans for recent law or regulatory changes;

– amendments needed to name a new plan trustee, custodian, or issuer;

– amendments needed to modify the plan to conform to the plan offered by the successor organization; and

– basic information not gathered in the past (e.g., beneficiary designation).

• Review the proposed amendment procedure with the financial organization’s attorney.

Most acquisitions and mergers require some form of amendment to the previous plan document. The procedures needed to change a trustee or custodian or alter plan language are controlled by the plan language and by state law.

One of two amendment methods usually is appropriate.

1. Have all IRA owners execute new plan documents to sign and to amend the old plans.

2. Amend old documents by negative consent.

The safest way to amend an IRA is to obtain written consent from the IRA owner. An alternate method is sometimes permitted in plan documents or under state law for certain types of amendments. Amend ment by “negative consent” permits financial organizations to send notice to IRA owners of proposed changes. If the IRA owner does not object within a specified time, the IRA owner is deemed to have consented to and accepted the amendments. The financial organization’s attorney can determine whether amendment by negative consent may be used. (See Chapter 2, Opening an IRA, for a discussion of amendment procedures.)

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Hold Harmless Language

A hold harmless statement is a written statement in which one party releases another from liability, usually for a specific transaction.

Miscellaneous TransactionsMany times, the transaction being contemplated by an IRA owner is neither specifically permitted nor specifically prohibited by the Internal Revenue Code or related regulations. The transaction may be said to fall within the “gray area” of the law. In those situations, an individual is best advised to discuss the issues with a tax advisor or attorney and then make an independent decision regarding whether the transaction should be completed. Financial organizations should avoid the appearance of giving tax advice in these situations. When a transaction falls within the gray area of the law, a financial organization may consider using hold harmless language similar to the following.

EXAMPLE: I have been advised by (financial organization name) that I should consult with a tax advisor or attorney before completing (described transaction) and I have done so. I have not received any tax advice from the financial organization. I understand that the transaction is one that is not clearly allowed nor disallowed by the Internal Revenue Code or related regulations.

Should any consequences arise from this transaction, I will not hold (financial organization name) in any way responsible. I assume full responsibility for any penalties or other consequences that may arise.

–––––––––––––––––––––––– ––––––––––––––––––––––––––––––––––––––––––––––––– Date (IRA Owner Signature)

–––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––– Date (Witness)

Contribution EligibilityA financial organization has the responsibility to accept only eligible IRA contributions. Most times, the financial organization must take the individual’s word that, for example, the deposit being made is one that is eligible to be contributed to an IRA. Multiple facts relating to the contribution generally are unknown to the financial organization. A financial organization is almost never privy to the total tax pictures of its IRA owners.

To avoid the appearance that the financial organization is monitoring and approving the contribution, some sort of hold harmless language in the plan document and contribution statements is appropriate.

EXAMPLE: I understand the eligibility requirements for the type of IRA contribution I am making and I state that I do qualify to make the contribution. I assume complete responsibility for (1) determining that I am eligible for an IRA each year that I make a contribution, (2) ensuring that all contributions I make are within the limits set forth by the tax laws, and (3) the tax consequences of any contribution (including rollover contributions) and distributions.

–––––––––––––––––––––––– ––––––––––––––––––––––––––––––––––––––––––––––––– Date (IRA Owner Signature)

–––––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––––––––––––– Date (Witness)

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Final Fiduciary Rule

In April 2016, the Department of Labor (DOL) issued a final rule and related exemptions defining fiduciary status for purposes of investment advice with respect to retirement plans, IRAs, health savings accounts (HSAs), Archer medical savings accounts (MSAs), and Coverdell education savings accounts (ESAs). The DOL refers to this guidance as the “conflict-of-interest” rule, its purpose being to protect individuals from biased advice from financial professionals.

The final rule defines when certain individuals and businesses become fiduciaries by providing investment advice for a direct or indirect fee. In effect, the rule aims to increase the number of fiduciaries by broadening the term “investment advice.”

As defined in the final rule, the term “investment advice” generally includes the following.

• A recommendation to buy, sell, hold, or exchange investments or a recommendation on how to invest assets that are rolled over, transferred, or distributed from a retirement plan, IRA, HSA, MSA, or ESA.

• A recommendation regarding the management of assets (e.g., investment strategies) or a recommendation regarding rollovers, transfers, or distributions from a retirement plan, IRA, HSA, MSA, or ESA—including whether, in what amount, in what form, and to what destination a rollover, transfer, or distribution should be made.

The key to determining whether investment advice is given is whether a “recommendation” occurs. A recommendation is a communication that “would be reasonably viewed as a suggestion” to take a particular course of action, or refrain from doing so. The more the advice is tailored to the recipient, the more likely it will be viewed as a recommendation.

In addition to investments such as mutual funds, stocks, bonds, and other securities, the DOL’s final rule clarifies that investment property subject to the regulations includes certificates of deposit and other similar investment products. As a result, depository organizations such as banks and credit unions must carefully consider the details of the final rule and how it will affect their policies and procedures. Providers of IRAs, HSAs, MSAs, and ESAs that become fiduciaries under the final rule will generally be subject to its compliance requirements. If an exemption does not apply, certain arrangements will result in prohibited transactions.

Under the final rule, businesses and financial professionals can provide investment education materials (e.g., certain plan information, asset allocation models, interactive investment materials, and general financial, investment, and retirement information) without becoming fiduciaries if the materials generally do not identify specific investment alternatives or distributions options. General communications—such as newsletters, marketing materials, public presentations, investment reports, and nonpersonal information are not considered recommendations giving rise to fiduciary status.

Best Interest Contract (BIC) ExemptionIn addition to the final rule, the DOL also issued a best interest contract (BIC) exemption. The DOL issued this exemption to allow existing, potentially conflicted compensation models to continue to be used if certain conditions are met. The BIC provisions include a streamlined exemption for financial professionals compensated on a level-fee basis. The conditions are as follows.

• A firm acknowledges fiduciary status for itself and its financial professionals.

• Basic standards of impartial conduct must be adhered to in giving advice.

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• Compensation must be reasonable (not fully defined in the final guidance).

• Procedures and policies must be in place to mitigate investor harm due to conflicts of interest.

• Both potential conflicts and compensation arrangements must be disclosed.

• The Employee Benefits Security Administration must be notified by email if a BIC is being used in an advising relationship.

Implementation Date The final regulations provided an effective date beginning April 10, 2017. In February 2017, President Trump issued a presidential memorandum instructing the DOL to begin a formal review process of the final rule. Thus, the effective date was extended to June 9, 2017, with a transition period ending July 1, 2019. This followed two previous DOL announcements of delays after the Trump administration asked the DOL to review the final fiduciary regulations.

During this transition period (and after), investment advice fiduciaries are required to adhere only to what the DOL defines as the “impartial conduct standard.” This standard requires investment advice fiduciaries to interact with retirement savers by

• receiving only reasonable compensation,

• making no misleading statements, and

• acting in their clients’ best interest.

What is delayed until July 1, 2019, is the requirement to comply with several prohibited transaction exemptions (PTEs), and most notably, to comply with the BIC, which requires investment advice providers to enter into enforceable contracts with certain investors.

Prohibited Transactions

Certain transactions involving IRAs are prohibited under IRC Sec. 408(e) and (m). A prohibited transaction generally is an improper use of an IRA by the IRA owner, beneficiary, or a disqualified person (which includes the IRA trustee, custodian, or issuer). Financial organizations that offer a wide variety of investment options (or offer self-directed IRAs in which the IRA owner takes a more direct control of his investments) may be at risk of inadvertently becoming involved in prohibited transactions.

The prohibited transaction rules are intended to ensure that IRA assets are invested in a manner that benefits the IRA itself (i.e., not the IRA owner), and to prevent a person (or entity) from using the assets in a self-serving manner. As described in IRC Sec. 408(e), IRA owners and beneficiaries may not engage in any prohibited transactions listed under IRC Sec. 4975, IRAs may not be invested in life insurance, and IRA assets may not be used for loans. IRC Sec. 408(m) provides that IRAs may not be invested in certain collectibles. In addition to the Internal Revenue Code, IRS Publications 590-A, Contributions to Individual Retirement Arrangements (IRAs), and 590-B, Distributions from Individual Retirement Arrangements (IRAs), also include some general discussion on IRA prohibited transactions.

In April 2016, the Department of Labor issued a final rule and related exemptions defining fiduciary status for purposes of investment advice with respect to IRAs and other retirement and savings arrangements. IRA administrators that become fiduciaries under the final rule will generally be subject to its compliance requirements. If an exemption does not apply, certain arrangements will result in prohibited transactions. See the previous section, “Final Fiduciary Rule,” for more information on the final rule and exemptions.

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Prohibited transactions can be very complex, so IRA owners or financial organizations should consult a competent attorney regarding any suspect transactions before engaging in such a transaction.

Prohibited Transactions Involving Disqualified PersonsUnder IRC Sec. 4975, certain taxes are assessed when disqualified persons participate in prohibited transactions involving IRAs. The prohibited transaction rules also generally apply to employer-sponsored retirement plans, health savings accounts, and to Coverdell education savings accounts.

Although the definition of what constitutes a disqualified person is detailed and complex (IRC Sec. 4975(e)(2)), some entities will always be considered disqualified persons with respect to IRA transactions. In addition to IRA owners and IRA beneficiaries, disqualified persons for IRAs include fiduciaries and relatives of the IRA owner (e.g., spouse, ancestor, lineal descendant, and any spouse of a lineal descendant). For IRA purposes, a fiduciary generally may include any individual who does the following.

• Exercises discretionary authority or control in managing the IRA or exercises any authority or control in managing or disposing of its assets.

• Provides IRA investment advice for a fee, or has any authority or responsibility to do so.

• Has any discretionary authority or responsibility in administering the IRA.

According to IRC Sec. 4975(e)(2), a disqualified person for IRA and retirement plan purposes is

(A) a fiduciary;

(B) a person providing services to the plan;

(C) an employer whose employees are covered by the plan (this is generally not applicable to IRAs but does include the owner of a business that establishes a qualified retirement plan);

(D) an employee organization whose members are covered by the plan (e.g., unions);

(E) certain 50 percent or more owners of C or D above;

(F) a family member of A, B, C, or E above (family members include spouse, ancestor, lineal descendant, and any spouse of a lineal descendant but not brothers or sisters);

(G) certain 50 percent or more owners (or control) of corporation, partnership, trust, or estate owned by A, B, C, D, or E;

(H) an officer, director, 10 percent or more shareholder, or a highly compensated employee of C, D, E, or G; or

(I) a 10 percent or more partner or joint venturer of a person described in C, D, E, or G.

IRC Sec. 4975 Prohibited TransactionsThe different situations in which prohibited transaction issues may arise are almost endless. One of the most common IRA prohibited transactions that falls under the governance of IRC Sec. 4975 is using the IRA assets to purchase property for personal use. Pursuant to IRC Sec. 4975(c), transactions between a plan (i.e., IRA) and a disqualified person that are considered to be prohibited transactions are any direct or indirect

(A) sale or exchange, or leasing, of any property between a plan (including an IRA) and a disqualified person;

(B) lending of money or other extension of credit between a plan and a disqualified person;

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(C) furnishing of goods, services, or facilities between a plan and a disqualified person;

(D) transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;

(E) act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest or for his own account; or

(F) receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

The purpose of the prohibited transaction rules is to discourage disqualified persons from dealing with the assets of an IRA (or retirement plan) in a self-dealing manner.

EXAMPLE: Golf pro, Louise Demonte, discovers that anyone who owns 1,000 or more shares of stock in Badlands Golf Courses, Inc., receives a free lifetime country club membership. Louise decides to instruct the trustee of her self-directed IRA to invest $5,000 (1,000 shares at $5 per share) of her IRA assets in Badlands Golf Courses, Inc., stock. Louise’s investment of her IRA assets in Badlands Golf Courses, Inc., stock would constitute a prohibited transaction under several IRC Sec. 4975 provisions. The basic premise behind each of these provisions is the concept of self-dealing (i.e., Louise is investing the assets of her IRA for her own personal benefit rather than for the benefit of the IRA).

PenaltiesAlthough the penalty for engaging in a prohibited transaction under IRC Sec. 4975 generally starts out at 15 percent for most types of retirement plans, the penalty is harsher for IRAs. When an IRA owner or beneficiary is involved in a transaction that is prohibited under IRC Sec. 4975, the IRA loses its tax-exempt status and the IRA owner (or beneficiary) is deemed to have received a distribution on the first day of the tax year in which the prohibited transaction occurred (IRC Sec. 408(e)). The distribution amount that the IRA owner is deemed to have received is equal to the IRA’s fair market value as of the first day of such tax year, and must be included in the IRA owner’s income for the year. Unless the IRA owner qualifies for an exception (e.g., is age 59½ or older, disabled), the 10 percent early distribution penalty tax also applies.

If someone other than the IRA owner or beneficiary engages in a prohibited transaction, that person may be liable for certain taxes. In general, there is a 15 percent tax on the amount involved in the prohibited transaction and a 100 percent additional tax if the transaction is not corrected.

Self-Correcting Certain Prohibited TransactionsThe Pension Protection Act of 2006 provides a statutory exemption that allows certain retirement plan and IRA prohibited transactions to be corrected without additional penalty if done within 14 days of discovery (or within 14 days of when the transaction should have been discovered) (IRC Sec. 4975(d)(23) and 4975(f)(11)). This statutory exemption covers acts under IRC Sec. 4975(c)(1)(A), (B), (C), and (D) that involve the acquisition, holding, or disposition of any security or commodity that is prohibited. The exemption does not apply to real estate transactions, and does not apply in situations when the IRA owner or other disqualified person (defined earlier) knew or should have known that the transaction was prohibited.

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To “correct” means to undo the transaction to the fullest extent possible, to make good any loss to the plan or affected account, and to restore to the plan or affected account any profits gained as a result of the prohibited transaction.

If the exemption applies, no excise tax is assessed, any tax assessed is abated, and any tax collected must be credited or refunded as a tax overpayment.

Life InsuranceNo portion of an IRA generally may be invested in life insurance contracts (IRC Secs. 408(a)(3) and 408(e)(5)(b)). An IRA may invest in annuity contracts, which, in the case of death before the time distributions commence, provide for a payment equal to the sum of the premiums paid or if greater, the cash value of the contract (Treas. Reg. 1.408-2(b)(3)).

If IRA assets are invested in life insurance, only the assets used to purchase the investment are considered distributed and taxable to the IRA owner (or beneficiary), not the entire IRA.

CollectiblesIRA assets cannot be invested in certain types of collectibles (IRC Sec. 408(m)). These generally include any artwork, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, or any other tangible personal property as defined by the U.S. Treasury Secretary. Before 1982, however, IRAs could invest in such goods, and therefore, some IRAs that invested in collectibles before 1982 may still hold such assets.

An IRA can, however, be invested in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the Treasury Department. IRAs also can be invested in any state issued coins, certain platinum coins, and certain gold, silver, platinum, and palladium bullion (IRC Sec. 408(m)(3)). Examples of coins that are prohibited are antique coins, commemorative coins, or foreign coins such as the Canadian Maple Leaf of the South African Krugerrand.

For IRAs that are invested in prohibited collectibles, the invested portion of the IRA assets is considered distributed and subject to tax and 10 percent early distribution penalty tax, if applicable.

LoansIRA owners and beneficiaries may not pledge any portion of their IRA assets as security for a loan. If an IR account owner engages in such transaction, only the pledged portion is considered distributed and is subject to tax and 10 percent early distribution penalty tax, if applicable (IRC Sec. 408(e)(4)). If, however, an IRA owner pledges an IR annuity as security for a loan, the IR annuity ceases to be an IRA and the account’s fair market value (FMV) as of January 1 of that year is treated as if distributed to the IRA owner on January 1, subject to applicable taxes (IRC Sec. 408(e)(3)).

If an IRA owner takes a loan from her IRA (IR account or IR annuity), the IRA ceases to be an IRA and the account’s FMV as of January 1 of that year is treated as if distributed to the IRA owner on January 1 and is subject to applicable taxes (IRC Sec. 408(e)(2) and (3)).

Temporary Relief for Cross-Collateralization ArrangementsThe IRS released Announcement 2011-81 in December 2011 granting temporary, limited relief for potential IRA prohibited transactions involving the use of non-IRA assets as security or collateral for investment obligations incurred in a self-directed IRA. Announcement 2011-81 identifies the relief as applying to “…circumstances in which the IRAs’ owners have signed certain indemnification agreements or granted certain security interests in accounts that may have an effect on their IRAs.”

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Announcement 2011-81 cites the Department of Labor Employee Benefits Security Administration’s (EBSA) Advisory Opinion 2011-09A that was released late in November 2011. In Advisory Opinion 2011-09A, the EBSA informed a taxpayer that granting a security interest in non-IRA accounts to cover potential investment losses on future investments in his self-directed IRA would violate the PT rules as an impermissible “extension of credit” to the IRA.

Announcement 2011-81 states that the IRS was recently informed by EBSA that it is considering further action on arrangements of this nature—arrangements referred to as “cross-collateralization.” In response, the IRS states in Announcement 2011-81 that pending further EBSA action followed by additional IRS guidance, the IRS will conditionally refrain from applying PT tax consequences against an IRA in which similar cross-collateralization arrangements have been made. The IRS will refrain from applying PT consequences only if such a security agreement has not yet been executed to satisfy the IRA obligation.

As summarized in a December 16, 2011, issue of the IRS Employee Plan News, the temporary relief is granted to IRA owners who have either of the following types of agreements with their brokers or financial institutions.

• Indemnification agreements where the IRA owner agrees to reimburse a broker or other financial institution for losses incurred in the IRAs

• Cross-collateralization agreements where the IRA owner grants a security interest in either a non-IRA account in favor of an IRA or in an IRA in favor of a non-IRA account

Proposed Amendment to PTE 80-26Prohibited transaction exemption (PTE) 80-26 addresses certain investment security arrangements between financial organizations and IRAs (or employer-sponsored retirement plan accounts). A PTE generally allows for a certain practice that is considered beneficial to a retirement plan, plan participant, or IRA owner but that technically might violate the prohibited transaction rules. PTE 80-26 allows short-term loans to a retirement plan for such limited purposes as paying certain plan operating expenses and paying plan benefits when investment liquidity is an issue. Without an exemption, such lending or “extension of credit” would be prohibited. In May 2013, the EBSA released a proposed amendment to PTE 80-26 that addresses certain IRA issues, as well.

Specific to this proposed amendment, the EBSA is proposing retroactive temporary PTE relief to retirement accounts that are involved in security arrangements that guarantee payment to a financial organization in the event of investment losses. Under such “cross-collateralization” or “indemnification” arrangements, if investment losses exceed the balance in one account, they may be satisfied by assets in another account. One such scenario might involve a contractual agreement to transfer assets from an IRA to a general brokerage account if the brokerage account contained insufficient assets to satisfy an investment loss obligation. Another might involve the transfer of assets from a non-IRA account into an IRA to satisfy investment losses incurred within the IRA.

The Securities Industry and Financial Markets Association (SIFMA) has sought EBSA PTE relief for such contractual arrangements that may involve IRAs and retirement plan accounts on the grounds that such indemnification arrangements have long been standard practice in the securities industry, and many taxpayers may have unintentionally participated in prohibited transactions because of this common practice.

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The EBSA makes clear that such security arrangements are certainly prohibited, but this proposed amendment provides temporary relief to allow such contractual arrangements to be rewritten. In the future, arrangements must contain no provisions requiring the transfer of assets between nonqualified investment accounts and IRAs (or employer plans). If adopted, the relief would extend retroactively to January 1, 1975, through a future date six months after a final amendment is published in the Federal Register.

Exempt TransactionsWhile IRC Sec. 4975(c) prohibits the furnishing of goods and services between IRAs and disqualified persons, the IRS and DOL have clarified that the receipt of premiums (e.g., payments of cash, property, or other consideration) and receipt of reduced- or no-cost services from the financial organization are not prohibited transactions if certain requirements are met, as follows.

PremiumsDepartment of Labor Prohibited Transaction Exemption (PTE) 93-1 allows most individuals (and family members) relief from any IRS sanctions if they accept cash, property, or other consideration (of a limited amount) from a financial organization for establishing or contributing to the IRA. There generally is no prohibited transaction for the receipt of cash, property, or other gifts, if all of the following requirements are met.

1. The IRA is established solely to benefit the IRA owner, spouse, or the IRA owner or spouse’s beneficiaries.

2. The payments are given only for establishing an IRA or making additional contributions to it.

3. During the year, the total fair market value of the payments received is not more than $10 for IRA deposits of less than $5,000, or $20 for IRA deposits of $5,000 or more.

The class exemption also provides that in the case of a financial organization that provides a premium of group term life insurance (generally a credit union), the limitations in conditions 2 and 3 above will not apply if during any taxable year, no more than $5,000 of the face value of the insurance is attributable on a dollar-for-dollar basis to the IRA assets.

Banking-Related ServicesControversy over offering free or discounted banking services in connection with making IRA contributions had been ongoing until the release of PTE 93-2 in 1993, which was amended in 1994 to apply to IRA owners with simplified employee pension (SEP) plan contributions and was redesignated as PTE 93-33. Under this PTE, IRA owners may receive free or discounted services from financial organizations described in IRC Sec. 408(n) under a relationship banking strategy without the IRA owner facing prohibited transaction concerns. Later, the DOL issued PTE 97-11, which gave the same opportunities to broker-dealers and applied the exemption to savings incentive match plan for employees of small employers (SIMPLE) IRAs.

Reduced- or no-cost service may be provided if all of the following conditions are met.

• The IRA that qualifies an individual to receive services is established solely to benefit the IRA owner, spouse, or the IRA owner’s or spouse’s beneficiaries.

• The financial organization itself must be legally able to offer the services, consistent with applicable federal and state banking laws.

• The services are provided in the ordinary course of business by the financial organization (or affiliate) to clients who qualify but do not maintain an IRA with the financial organization.

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• The IRA deposit balance required by the organization for the IRA to be included in the relationship banking program must be equal to the lowest balance required for any other type of account which the organization includes in the program. For example, assume that an organization provides free checking for depositors with an aggregate balance in certificates of deposit (CD), savings accounts, and IRAs that exceeds $5,000. If the minimum balance required to be included in the program is $1,500 for CDs and $500 for savings accounts, the maximum amount that financial organizations may require for IRAs to be included in the program is $500 (regardless of whether the IRA assets are invested in CDs or savings accounts).

• The rate of return on an IRA investment is not less than the return on an identical investment that could have been made at the same time at the same branch of the financial organization by a client who is not eligible for (or does not receive) the services.

Following is an example of an allowable offering of a free banking service associated with the IRA.

EXAMPLE: Eleanor Samson has an IRA at Midwest Bank. Midwest Bank offers free checking to any client whose combined balances in any accounts at the bank (excluding checking) exceed $5,000. Eleanor has a savings account with a $2,500 balance and an IRA with a $2,000 balance. Eleanor is making a current-year contribution to her IRA of $1,500. Following the contribution, Eleanor will be eligible for free checking because the combined balances of her savings account and her IRA will exceed $5,000.

Initially, PTE 93-33 covered only IRA owners with assets invested in deposit accounts. But an amendment to PTE 93-33 in 1994, expanded the protection to participants with assets invested in “securities for which market quotations are readily available,” such as stocks, bonds, and mutual funds. (The amendment specifically excludes protection for individuals with investments in securities offered by the organization, or its affiliate, exclusively to IRAs.) Examples of securities for which market quotations are not readily available include nonpublicly-traded limited partnerships, foreign currency, futures, commodities, and real estate.

Relationship Brokerage Services ExemptionPTE 97-11 permits broker-dealers registered under the Securities Exchange Act of 1934 to provide free or low-cost brokerage services to IRA owners without fear of the IRA owner incurring prohibited transactions if several conditions are met. The proposed exemption basically would extend the prohibited transaction relief described in PTE 93-33 to IRA owners who do business with broker-dealers.

Under PTE 97-11, broker-dealers may include an individual’s IRA (Traditional and Roth), SEP plan, and SIMPLE IRA plan assets when determining whether an individual is eligible for free or low-cost brokerage services (a relationship brokerage program). The types of services a broker-dealer can offer to clients include financial planning, direct deposit/debit and automatic fund transfer privileges, enhanced account statements, toll-free access to client service centers, check-writing privileges, debit/credit cards, special newsletters, and reduced brokerage and asset management fees.

The conditions described in PTE 97-11 are substantially the same as those described in PTE 93-33, except for the terminology and operational differences appropriate for broker-dealers. One addition included in PTE 97-11 is to extend the exemption’s coverage to SIMPLE IRA owners. The second addition is to include “letter of intent programs” under the coverage of the final class exemption. A letter of intent program is one in which broker-dealers reduce sales commissions based on the aggregate of a client’s actual purchases and anticipated purchase over a specified period of time, as agreed to by the client.

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The following conditions are viewed by the DOL as necessary to ensure that the retirement income of IRA owners is not jeopardized by relationship brokerage programs.

IRA Balance – The IRA balance taken into account for purposes of determining eligibility to receive relationship brokerage arrangement services must be established and maintained for the exclusive benefit of the IRA owner, his spouse, or beneficiaries.

Allowable Services – The relationship brokerage services must be of the type that the broker-dealer could offer consistent with all applicable federal and state laws regulating broker-dealers.

Not Solely for IRA Owners – The relationship brokerage services must be provided by the broker-dealer (or an affiliate of the broker-dealer) in the ordinary course of the broker-dealer’s business to clients who qualify for reduced or no cost services, but do not maintain IRAs, SEP plans, or SIMPLE IRA plans with the broker-dealer.

Same Methods Must Be Used for Determining Balances – For purposes of determining eligibility to receive services, the relationship brokerage arrangement must satisfy one of the following.

• Eligibility requirements based on the IRA balance must be as favorable as any such requirements based on the value of any other type of account that the broker-dealer includes to determine eligibility.

• Eligibility requirements based on IRA fees must be as favorable as any requirements based on the amount of fees incurred by any other type of account that the broker-dealer includes to determine eligibility.

Must Not Exceed Reasonable Compensation – The combined total of all fees for the provision of services to the IRA must not exceed reasonable compensation within the meaning of IRC Sec. 4975(d)(2).

Fair Rate of Return – The investment performance of the IRA investment must be no less favorable than the investment performance on an identical investment(s) that could have been made at the same time by a client of the broker-dealer who is not eligible for (or who does not receive) reduced or no-cost services.

Similar Services – The services offered under the arrangement to an IRA owner must be the same as are offered to nonIRA clients with account values of the same amount or the same amount of fees generated.

NOTE: DOL Advisory Opinion Letter 98-03A clarified that Roth IRAs are covered by the relief provided in PTE 97-11.

IRAs Added to PTE 2002-13In PTE 2002-13, released March 1, 2002, the DOL added IRAs and plans under IRC Sec. 4975(e)(1) to several previously issued PTEs. Those PTEs cited in PTE 2002-13 apply primarily to retirement plans and have minimal effect on IRAs.

Abusive Tax-Shelter Transactions

The IRS and U.S. Department of Justice joined forces in early 2000 to create a plan to reduce abusive tax-shelter schemes made by taxpayers. As a result of these efforts, the IRS has identified certain abusive transactions as “listed” tax-avoidance transactions and “reportable transactions” through various notices, some of which involve retirement plans and IRAs.

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Abusive Tax SheltersAn abusive tax shelter generally offers inflated tax savings, which are disproportionately greater than the actual investment placed at risk. While investments generally are intended to generate income, an abusive tax shelter generates little or no income, and exists mainly to reduce taxes unreasonably for tax avoidance or evasion. Self-directed IRAs give IRA owners considerable independence and control over their investment choices. In the past, the IRS has identified Roth IRAs as a savings vehicle at risk for abusive tax shelters.

Excise TaxesThe Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) imposes excise taxes on certain individuals involved in prohibited tax-shelter transactions. An excise tax imposed on the “entity manager” of an IRA or retirement plan that has engaged in a prohibited tax-shelter transaction can be as high as $20,000 per incident (IRC Sec. 4975(b)(2)). The entity manager is a person who approves or otherwise causes the entity to be a party to the prohibited tax-shelter transaction (IRC Sec. 4975(d)(2)). In a fully self-directed retirement plan or IRA, this typically is the participant or IRA owner who selected the prohibited investment. In retirement plans or IRAs that are not fully self-directed, or “managed IRAs,” the entity manager could be the person responsible for determining the investment options available to the participant or IRA owner.

Required DisclosuresIn addition to the excise tax, TIPRA also requires disclosure of prohibited tax-shelter transactions by individuals who engage in such transactions (e.g., entity managers) and imposes penalties for noncompliance with the disclosure requirements. The disclosure requirements and penalties generally are effective for transactions entered into after May 17, 2006. The entity manager may be required to file Form 8886-T, Disclosure by Tax-Exempt Entity Regarding Prohibited Tax Shelter Transaction, with the IRS to disclose information about the prohibited tax-shelter transaction. TIPRA also requires that any taxable party that participates in a prohibited tax-shelter transaction must disclose by statement to the entity (presumably the IRA owner or the financial organization) that the entity is a party to the prohibited tax-shelter transaction (IRC Sec. 6011(g), as amended by TIPRA). Penalties for lack of disclosure may apply. These taxable parties may be required to file Form 8886, Reportable Transaction Disclosure Statement, with the IRS.

IRA Fees

All IRA personnel should be familiar with how IRA fees and other charges are categorized and accordingly, how the expense is settled. IRA expenses can be split into three groups.

• Administrative expenses

• Sales charges and commissions

• A combination of administrative and sales fees

The means of collecting these fees varies depending on the type of fee involved.

Administrative FeesMany financial organizations assess an annual fee for maintaining an IRA. In addition, fees for transactions such as rollovers, transfers, required minimum distribution calculations, terminations, and distributions are becoming more common. If an IRA owner engages an investment manager for the IRA, an investment management fee typically will be assessed. All of these fees are considered to be administrative fees.

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IRA owners may either pay administrative fees out-of-pocket to the financial organization, or have the fees debited from the IRA, if the IRA documents so permit (Treas. Reg. 1.404(a)-3(d), Revenue Ruling 84-146). Some financial organizations, through their plan documents, will dictate the method for fee payment. If the financial organization allows fees to be paid separately by the IRA owner, the financial organization generally will retain the right to charge the IRA for any unpaid fees.

Fees Paid Out-of-PocketIf the IRA owner is allowed to pay the administrative fees out-of-pocket, he may be able to take a deduction for the fees. IRA administrative fees generally are considered to be an ordinary and necessary expense incurred in connection with the maintenance of the IRA. Therefore, the IRA owner generally is entitled to a deduction under IRC Sec. 212 for the IRA administrative fee if the IRA owner itemizes deductions exceeding two percent of adjusted gross income.

The IRA may not reimburse the IRA owner for administrative fees paid directly by the IRA owner. Any such reimbursement to the IRA owner is considered a reportable distribution to the IRA owner.

NOTE: Effective for tax years beginning after December 31, 2017, and before January 1, 2026, the Tax Cuts and Jobs Act of 2017 eliminates itemized deductions for IRA trustee fees paid out of pocket by an IRA owner.

Fees Paid by the IRAAs an alternative to paying administrative fees separately, the fees may be debited from the IRA. If the IRA owner chooses to have the admin istrative fees paid from the IRA assets, the IRA owner is prohibited from reimbursing the IRA for the fees. Any attempted reimbursement is considered an IRA contribution, reportable on IRS Form 5498, IRA Contribution Information. Note, if the IRA owner has already contributed the maximum eligible amount for the year in which the reimbursement occurs, an excess contribution results.

Sales Charges and Brokers’ CommissionsCommissions and sales charges resulting from investments such as stock and mutual funds are common in IRAs. The IRS has ruled that brokers’ commissions are not recurring administrative or overhead expenses relating to the maintenance of the IRA. Rather, brokers’ commissions are incurred when the IRA assets are actually invested and relate to the growth of the IRA.

IRS Revenue Ruling 86-142 established that broker’s fees for requested transactions are not to be considered recurring administrative expenses for the maintenance of an IRA. Because IRA owners may pay only recurring administrative expenses out-of-pocket, broker’s transaction charges generally must be deducted from the IRA balance. Any attempt to pay the broker directly or to reimburse the IRA for the commission or sales charge amount is considered a contribution to the IRA, reportable on IRS Form 5498. If the IRA owner has already made the maximum IRA contribution allowed for the year, any dollars paid to the IRA or to the broker directly will be treated as an excess IRA contribution.

Commissions and sales charges are not deductible under IRC Sec 212.

Combination Administrative and Sales FeesUnder some fee arrangements, various types of fees are combined and charged to the IRA as one sum. For example, it is not uncommon for the asset manager’s fee, the brokerage firm’s fee, and the broker’s commission to be combined and charged to the IRA as one fee. Such combined fees are sometimes referred to as “wrap fees.”

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The IRS has reviewed wrap fees in the qualified retirement plan context but has not issued official guidance on the payment and deductibility of these fees for IRAs. Presumably, combined IRA fees would be treated in the same manner as qualified plan wrap fees. In qualified plans, if the plan administrator can identify the portion of the combined fee attributable to commissions and sales charges and the portion that reflects administrative fees, the different portions of the fee may be paid separately.

But in Private Letter Ruling (PLR) 200507021, issued in November 2004, the IRS makes a distinction in defining when brokerage-related IRA fees may be paid outside an IRA rather than deducted from the IRA assets. In four investment portfolios cited in the PLR, clients each paid an annual single fee based on an asset-based formula, independent of the number or kind of investment transactions. Clients who participated were predominantly paying for investment advisory, money management, and other administrative services. One other portfolio cited in the PLR allowed investors to decide whether they would pay investment fees on a transaction-by-transaction basis, or by an annual asset-based formula. The IRS ruled that, if the IRA fee is asset based—varying by asset size, and not by the number of transactions—such fees may be considered recurring administrative expenses, and thus may be paid out-of-pocket. This allows retention of more tax-deferred assets in the IRA.

NOTE: A PLR may be relied upon only by the person (or persons) requesting the ruling.

Liquidating Assets to Pay FeesBecause the payment of fees is an ongoing concern, most financial organizations have language in the IRA plan agreement (generally in or following Article VIII) allowing the financial organization the right to liquidate assets, if necessary, to pay fees. Another alternative for financial organizations with fee concerns is to require that the IRA owner maintain a certain amount of liquidity in the IRA to be used to pay fees or other IRA expenses.

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Glossary of Terms401(k) plan. An IRC Sec. 401(k) plan is a plan that allows participants to defer receipt of a portion of their wages under a qualified cash or deferred arrangement, which is part of a profit-sharing, stock bonus plan, or pre-ERISA money purchase pension plan.

403(b) plan. An IRC Sec. 403(b) plan is a plan that allows employees of IRC Sec. 501(c)(3) organizations and public schools to defer a portion of their wages under a cash or deferred arrangement. Eligible employers also may contribute amounts on behalf of their employees.

ACP test. See “actual contribution percentage test” in this Glossary.

ACP testing safe harbor. The IRS allows employers to automatically satisfy the ACP test if the ACP testing safe harbor requirements are satisfied.

active participant. Active participants are individuals who make or receive contributions to their retirement plan accounts or are eligible to earn retirement credits in a retirement plan for an applicable year. Active participants in certain retirement plans may be limited in the amount of IRA contributions they can deduct on their income tax returns.

actual contribution percentage test. The actual contribution percentage (ACP) test is a nondiscrimination test found in IRC Sec. 401(m), which applies only to plans that have matching or after-tax employee contributions. The test imposes limits on matching and after-tax contributions for highly compensated employees each year, based on the average percentage received by the plan’s nonhighly compensated employees.

actual deferral percentage test. The actual deferral percentage (ADP) test is a nondiscrimination test that applies to salary deferral contributions in 401(k) plans (IRC Sec. 401(k)(3)) and SAR-SEP plans (IRC Sec. 408(k)). The ADP test imposes limits on the percentage of compensation that highly compensated employees may defer into the plan each year, based on the average percentage of compensation deferred by the plan’s nonhighly compensated employees.

adoption agreement. This portion of a prototype qualified retirement plan, SEP, or SIMPLE plan document contains the options that an employer may select based on the provisions allowed in the basic plan document. The employer must complete and sign the adoption agreement to establish a qualified plan, SEP, or SIMPLE plan.

ADP test. See “actual deferral percentage test” in this Glossary.

ADP testing safe harbor. The IRS allows employers to automatically satisfy the ADP test if the ADP testing safe harbor requirements are satisfied.

ANBI. See “adjusted net business income” in this Glossary.

annual additions. This is the total dollar amount contributed in a given year to the account of a participant in a defined contribution plan, as defined in IRC Sec. 415(c). The allocations must be limited to the lesser of 100 percent of the participant’s compensation or the dollar amount in effect for the year (subject to cost-of-living adjustments).

230 • Glossary of Terms

annuity. An annuity is a contract sold by an insurance company that provides the purchaser with the option to receive a sum of money payable over life expectancy or over a fixed period of time. The contract is “annuitized” when the sum of money is converted to periodic payments.

automatic enrollment. Automatic enrollment is a retirement plan provision available to plans that include salary deferral features (e.g., IRC Sec. 401(k) or 403(b) plans) in which employers can automatically enroll their employees, if certain requirements are met.

automatic rollover. An employer must directly roll over to an IRA any mandatory distribution amounts if the plan participant’s vested balance exceeds $1,000 but does not exceed $5,000, unless directed otherwise by the plan document, plan participant, or beneficiary.

average benefits test. When a plan fails the ratio percentage test for minimum coverage testing under IRC Sec. 410(b), the average benefits test is an alternative testing method for coverage testing.

Best Interest Contract (BIC) exemption. A Department of Labor exemption that allows entities such as registered investment advisers, broker-dealers and insurance companies, and their agents and representatives, that are fiduciaries by reason of the provision of investment advice, to receive compensation that may otherwise give rise to prohibited transactions as a result of their advice to plan participants and beneficiaries, IRA owners, and certain plan fiduciaries (including small plan sponsors).

blackout period. A blackout period is a period of time during which the participants or beneficiaries of the plan lose the ability to direct or diversify assets, obtain loans, or receive distributions from a retirement plan. Blackout periods often occur as a result of mergers, acquisitions, spin-offs, investment changes, and recordkeeper changes.

bonding requirement. ERISA generally requires that persons having direct or indirect control or authority over qualified retirement plan assets be bonded by a corporate surety company to insure against fraudulent acts involving plan assets or plan operations. Certain exceptions apply.

capital gains election. The capital gains election is a special tax treatment that may be used with lump-sum distributions of a plan participant who was born before January 2, 1936.

cashout. See “mandatory distribution” in this Glossary.

catch-all amendment. A catch-all amendment is a full and up-to-date IRA plan agreement and disclosure statement that is sent to all existing IRA owners to make up for past failures to make required amendments. Although a catch-all amendment shows a good faith compliance effort on behalf of the financial organization, it does not guarantee that the IRS will waive penalties for past failures.

catch-up contribution. This is a type of contribution that individuals age 50 and older may make to Traditional IRAs, Roth IRAs, SAR-SEP and SIMPLE plans, the federal Thrift Saving Plan, and 401(k), 403(b), and governmental 457(b) plans.

compensation cap. The compensation cap is the maximum compensation amount under IRC Sec. 401(a)(17), subject to cost-of-living adjustments, that employers may consider for SEP, SIMPLE, qualified retirement plan, and 403(b) plan purposes.

conduit IRA. A conduit IRA is an IRA that contains only assets that have been rolled over from an employer-sponsored retirement plan.

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controlled group. A controlled group is one or more business entities that are related through certain common ownership interests. When a controlled group of businesses exists, it must be treated as a single employer for SEP, SIMPLE, qualified retirement plan, and 403(b) plan testing and coverage purposes.

conversion. A conversion is a taxable movement of cash or other assets from a Traditional or SIMPLE IRA to a Roth IRA.

custodian. The custodian is a bank or savings and loan association, as defined in IRC Section 408(n), or any other entity that has the IRS’ approval to act as custodian.

Coverdell education savings account (ESA). The Coverdell education savings account (ESA), created by TRA-97, is a type of savings arrangement that is established for the benefit of a designated beneficiary (potential student) to pay for education expenses.

cross-trading. Cross-trading is the purchase or sale of a security between a plan and any other account managed by the same investment manager.

deemed IRA. Under the EGTRRA rules, a qualified employer plan may allow employees to make voluntary contributions that are treated (deemed) as being made to an IRA (either Roth or Traditional), if certain requirements are met.

default investment. A default investment is a plan investment that the employer chooses if an employee does not elect investments before making contributions to the plan (e.g., if the employee is automatically enrolled in the plan).

defined benefit plan. A defined benefit plan is an employer-sponsored retirement plan that promises a predetermined benefit for plan participants at retirement. Funding for a defined benefit plan generally is provided by the employer and is based on actuarial assumptions and calculations, which determine the contribution amount required to provide the promised future benefit.

defined contribution plan. A defined contribution plan is an employer-sponsored retirement plan that both the employer and the participants can fund and that defines the level of contributions that may be made for plan participants. The benefit a participant will receive from the plan is not guaranteed and is largely dependent on contribution levels and investment performance.

Department of Labor (DOL). The DOL is a federal government department that governs employee and retiree benefits and that implements labor laws that support workers’ rights.

designated beneficiary. The designated beneficiary is the beneficiary whose life expectancy is used to calculate RMDs. A plan participant’s designated beneficiary is determined based on the beneficiaries designated as of the date of death and who remain beneficiaries as of September 30 of the calendar year following the calendar year of the plan participant’s death.

designated financial institution. Under IRC Sec. 408(p)(7), a SIMPLE IRA plan document may require the employer to deposit all SIMPLE IRA plan contributions at the same financial organization. The financial organization in such a case is known as the “designated financial institution” (DFI).

designated Roth account. A designated Roth account is a separate account in an IRC Sec. 401(k), 403(b), governmental 457(b) retirement plan, or the federal Thrift Savings Plan (TSP) that holds designated Roth contributions and earnings attributable to Roth contributions on behalf of a plan participant.

232 • Glossary of Terms

designated Roth contribution. Designated Roth contributions are employee elective contributions made to an IRC Sec. 401(k), 403(b), governmental 457(b) retirement plan, or federal Thrift Savings Plan (TSP) that, unlike pretax deferrals made under the plan, are included in gross income in the year the contribution is made.

determination letter. A determination letter is a written statement issued by the IRS that addresses a plan’s qualified status to ensure that the specific provisions of the employer’s plan document meet the requirements necessary to be treated as a qualified retirement plan.

DFI. See “designated financial institution” in this Glossary.

disclaimer. An IRA or retirement plan beneficiary may give up the right to an interest in the inherited account by filing a qualified written disclaimer.

EACA. See “eligible automatic contribution arrangement” in this Glossary.

early distribution. Distributions taken from a Traditional, Roth, or SIMPLE IRA, qualified retirement plan, and 403(b) plan before the IRA owner or plan participant attains age 59½ are called “early distributions.” Early distributions generally are subject to a 10 percent IRS penalty tax (25 percent for certain SIMPLE IRA distributions) unless a penalty exception applies.

earned income. Earned income generally is the amount of income a person earns for services rendered. Earned income is considered eligible compensation for making IRA contributions and can also be considered compensation paid to self-employed individuals for IRA and retirement plan contribution purposes.

EFTPS. See “Electronic Federal Tax Payment System” in this Glossary.

Electronic Federal Tax Payment System (EFTPS). EFTPS is a federal program for making federal tax payments electronically. This includes income tax withholding from IRAs and retirement plan accounts.

eligible automatic contribution arrangement (EACA). An EACA is a plan provision under which participants who do not make a deferral election are treated as having elected to defer a percentage of their compensation if certain plan requirements are met.

eligible rollover distribution. A distribution from a qualified retirement plan, 403(b) plan, or governmental 457(b) plan that is eligible to be rolled over (either directly or indirectly) to an IRA or another eligible retirement plan is sometimes called an “eligible rollover distribution.”

Employee Benefits Security Administration (EBSA). One of several DOL agencies, EBSA protects employee benefits and encourages retirement plan compliance through programs such as the Delinquent Filer Voluntary Correction (DFVC) program, the Voluntary Fiduciary Correction Program (VFCP), and the ERISA Filing Acceptance System (EFAST). EBSA is authorized to enforce civil actions and assess monetary penalties for violations of the Title I provisions of the Employee Retirement Income Security Act of 1974 (ERISA).

Employee Plans Compliance Resolution System (EPCRS). The EPCRS is a system of plan correction programs that the IRS established to help employers who have failed to meet one or more requirements of the Internal Revenue Code to correct their plans to avoid plan disqualification.

employee stock ownership plan (ESOP). An ESOP is an employee benefit plan in which participants invest primarily in employer securities.

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employer reversion. When a qualified retirement plan is terminated and excess assets remain in the plan after all the plan participants have received their payouts, the excess assets in the plan may revert to the employer. Congress imposes excise taxes on most employer reversions.

employer-sponsored IRAs. Employer-sponsored IRAs are IRA trusts under IRC Sec. 408(c) that are established by employers or certain employer associations for the exclusive benefit of employees. Employer-sponsored IRAs can be funded by either or both the employer or employee.

EPCRS. See “employee plans compliance resolution system” in this Glossary.

ESOP. See “employee stock ownership plan” in this Glossary.

excess accumulation. If the amount distributed to an individual during a taxable year is less than the required minimum distribution for the year, the individual will be subject to an excess accumulation penalty tax of 50 percent of the distribution amount that should have been taken but was not. This penalty applies to IRA owners and plan participants (and their beneficiaries).

excess aggregate contribution. 401(k) plan contributions that exceed the IRC Sec. 401(m) actual contribution percentage (ACP) test limits are excess aggregate contributions.

excess contribution. The IRA contribution amount exceeding the allowable limits is an excess contribution. For 401(k) plans, contributions that cause a plan to fail the IRC Sec. 401(k) actual deferral percentage (ADP) test are excess contributions.

excess deferrals. Excess deferrals are employee salary deferral contributions that exceed the annual limits allowed under IRC Sec. 402(g).

excess nondeductible employer contribution. Excess nondeductible contributions are employer contributions that exceed the allowable deductible amount. The Internal Revenue Code mandates a 10 percent penalty on the nondeductible contribution amount.

fair market value. The fair market value is the value of a Traditional, Roth, or SIMPLE IRA as of a certain date. Financial organizations must provide the December 31 fair market value to each IRA owner and to the IRS each year.

FDIC. See “Federal Deposit Insurance Corporation” in this Glossary.

Federal Deposit Insurance Corporation (FDIC). The FDIC insures deposit accounts and deposit-type investments of all banks chartered by the federal government, most banks chartered by state governments, and savings associations.

fiduciary. A fiduciary is someone who has discretionary authority or responsibility in administration of a plan or has discretionary authority or control for management or disposition of plan assets. It also is someone who provides or has authority to provide investment advice for a fee or other compensation (direct or indirect) with respect to money or other property of a plan.

first-time homebuyer. A first-time homebuyer, for purposes of the early distribution penalty tax exception, is an individual (and the individual’s spouse) who had no present ownership interest in a principal residence during the two-year period ending on the date of acquisition of the principal residence.

fiscal year. A fiscal year is the 12-month accounting period that constitutes the employer’s tax year.

234 • Glossary of Terms

forfeitures. When a qualified retirement plan participant who is less than 100 percent vested separates from service, the participant gives up the right to any nonvested employer contributions. These forfeited amounts are called “forfeitures.“

frozen plan. A frozen plan is one in which the employer will no longer make contributions to participants, but the distribution of assets will not be made until a later date. An employer must continue to maintain a frozen plan until all of the assets are distributed.

gap period income. Gap period income is any earning or loss that is attributable to an excess contribution and that is earned after the end of the plan year in which the excess occurred but before the excess is distributed.

governmental 457(b) plan. A governmental 457(b) plan is an eligible deferred compensation plan maintained by a governmental entity.

health savings accounts. Created by the Medicare Prescription Drug and Modernization Act of 2003, health savings accounts (HSAs) are tax-favored consumer savings arrangements for individuals and families covered by high deductible health insurance plans. HSAs are designed as a savings tool to help pay for medical expenses incurred by the HSA owner, spouse, and dependents.

HCE. See “highly compensated employee” in this Glossary.

highly compensated employee. An employee defined in IRC Sec. 414(q) is a highly compensated employee (HCE). Benefits provided to HCEs are measured when performing the ADP and ACP tests for 401(k), 403(b), and SAR-SEP plans.

income averaging. An individual who receives a lump-sum distribution from a qualified retirement plan and includes those assets in taxable income may be eligible to determine the tax liability as if the distribution had been received over a 10-year period. Only plan participants who attained age 50 before January 1, 1986 (and their beneficiaries) may be eligible.

individual retirement account. An individual retirement (IR) account is a retirement savings arrangement that must qualify under IRC Sec. 408(a). IR accounts may be established by a bank, savings and loan association, credit union, brokerage firm, or other organization that can demonstrate to the IRS the ability to lawfully administer the trust.

individual retirement annuity. An individual retirement (IR) annuity is a retirement savings arrangement that must qualify under IRC Sec. 408(b). IR annuities may be established by insurance companies.

individual retirement arrangement. An individual retirement arrangement (IRA) is an individual retirement account or an individual retirement annuity. An IRA may be a Traditional, Roth, or SIMPLE IRA.

individually designed plan. An individually designed plan is a retirement plan that has not been pre-approved by the IRS, and is drafted to meet the specific needs of a single employer or multi-employer group.

inherited IRA. Inherited IRAs are IRAs that have been inherited by IRA beneficiaries or that hold retirement plan assets that were rolled over by certain beneficiaries of eligible employer-sponsored retirement plans.

in-service distribution. Profit sharing plans may allow a plan participant to take a distribution, referred to as an “in-service distribution,” from the plan before the participant incurs a permissible triggering event.

Internal Revenue Code (IRC). The Internal Revenue Code of 1986, as amended, contains the statutes relating to federal tax law.

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Internal Revenue Service (IRS). The IRS is an agency of the Department of Treasury that is headed by the Commissioner of Internal Revenue. The IRS interprets and enforces the tax laws.

involuntary cashout. See “mandatory distributions” in this Glossary.

IR annuity. See “individual retirement annuity” in this Glossary.

IRA. See “individual retirement arrangement” in this Glossary.

IRA disclosure statement. When an individual establishes an IRA, the financial organization must provide a disclosure statement that explains in nontechnical language the rules that govern the IRA.

IRA financial disclosure. The IRS requires that financial organizations provide certain financial disclosures to individuals who establish a Traditional IRA, Roth IRA, or SIMPLE IRA. The financial disclosure is intended to be a consumer protection device, requiring financial organizations to disclose projected earnings, early withdrawal penalties, trustee fees, and other service fees such as transfer or rollover fees.

IRC. See “Internal Revenue Code” in this Glossary.

issuer. An issuer is an insurance company that offers individual retirement annuity contracts.

Keogh plan. An owner-only retirement plan (sometimes with spouse) is sometimes called a “Keogh plan,” named after the late Congressman Eugene Keogh who in the 1960s spearheaded pension plan legislation that created the owner-only retirement plan concept.

key employee. An individual who meets any of the criteria listed in IRC Sec. 416 is a key employee. If the benefits allocated to the key employees of a qualified retirement or SEP plan exceed the allowable limits, the plan is deemed to be top-heavy.

leased employee. For plan eligibility purposes, an individual who provides services to an employer under an agreement between the employer and a leasing organization is a leased employee if the individual performs services on a full-time basis for a period of at least one year.

life expectancy. Generally, life expectancy is the number of years an individual is expected to live based on her current age. Life expectancy is most commonly used to determine the amount an individual must take as a required minimum distribution from an IRA or retirement plan.

MAGI. See “modified adjusted gross income” in this Glossary.

mandatory distribution. A mandatory distribution is a total distribution of a qualified retirement or 403(b) plan participant’s vested balance. A plan may require a mandatory distribution if a participant separates from service with a vested plan balance of $5,000 or less.

master plan. A master plan is a prototype plan document that requires all employers using the plan document to place their plan contributions in the same trust.

matching contributions. Matching contributions are employer contributions made to a 401(k), SIMPLE IRA, SIMPLE 401(k) plan, or 403(b) plan. Employers generally make matching contributions in relation to employee salary deferrals and employee after-tax contributions, based on the terms of the plan.

MDIB. See “minimum distribution incidental benefit” in this Glossary.

minimum coverage test. The minimum coverage tests are tests defined under IRC Sec. 410(b) that generally require that highly compensated employees (HCEs) do not receive benefit coverage that is disproportionately better than that available to nonHCEs.

236 • Glossary of Terms

minimum distribution incidental benefit (MDIB). Minimum distributions that are paid in the form of a life (or joint and survivor) annuity to beneficiaries of retirement plans and IR annuities are referred to as “minimum distribution incidental death benefits.”

modified adjusted gross income (MAGI). For purposes of IRA contribution deductions, MAGI is adjusted gross income as shown on an IRA owner’s income tax return without taking into account certain deductions and exclusions.

money purchase pension plan. A money purchase pension plan is a defined contribution plan with mandatory annual contributions at a set percentage, which may range from zero percent to 25 percent of compensation as chosen by the employer in the plan.

multiemployer. A multiemployer retirement plan is a collectively bargained plan that is maintained by more than one employer.

multiple employer. A multiple employer plan is either a plan maintained by two or more employers that share common ownership, but that are not part of a controlled group, or employers that share no common ownership, but participate in the same plan.

mutual funds. Mutual funds are groups or “pools” of stock in different companies or different industries.

National Credit Union Administration (NCUA). The NCUA insures deposit accounts (e.g., share drafts and certificates) and other interest bearing deposit-type investments, for customers of insured credit unions.

NCUA. See “National Credit Union Administration” in this Glossary.

nondeductible contribution. A Traditional IRA contribution for which an IRA owner does not claim an income tax deduction is a nondeductible contribution.

nondeductible employee contribution. Some 401(k) plans and 403(b) plans allow participants to make contributions to the plan on an after-tax or nondeductible basis. The contributions are called “nondeductible employee contributions,” and are subject to the actual contribution percentage (ACP) test.

nondiscrimination test. A qualified retirement plan and a 403(b) plan must test for nondiscrimination in three areas: 1) amount of contributions or benefits, 2) availability of benefits, rights, and features, and 3) effect of plan amendments and terminations. Broadly speaking, other required tests (e.g., the ADP test) also are considered nondiscrimination tests.

nonperiodic payment. Traditional, Roth, or SIMPLE IRA distributions that are payable on demand are treated as nonperiodic payments. Distributions from a qualified retirement plan or 403(b) plan that are not periodic payments (defined later) or corrective distributions are nonperiodic payments.

nonqualified distribution. If a distribution from a Roth IRA or a designated Roth account under a 401(k) or 403(b) plan is not a qualified distribution (see “qualified distribution”), any earnings distributed are subject to taxes and a 10 percent early distribution penalty tax (unless the individual meets a penalty tax exception).

nonrecalculation. Nonrecalculation is a method of calculating beneficiary single life expectancy payments. Under this method, a divisor from the IRS Single Life Expectancy Table is used to calculate the payment for the first beneficiary distribution year, and the divisor is reduced by one to calculate each subsequent year’s payment.

Glossary of Terms • 237

nonstandardized plan. A nonstandardized pre-approved qualified retirement plan is written to satisfy various tax qualification requirements and allows an adopting employer more latitude in setting plan eligibility criteria, definitions of compensation, etc., than a standardized plan. Document providers may also permit employers to make minor changes to post-Pension Protection Act (PPA) nonstandardized plan documents.

opinion letter. Under the IRS’ PPA and earlier opinion letter program, the IRS issues this letter to businesses that sponsor PPA master and prototype plans, stating its approval that the plan meets the Internal Revenue Code tax qualification requirements as to the form of the plan. Under a revised opinion letter program, volume submitter plans become part of the opinion letter program post-PPA.

ordering rules. Ordering rules define the order in which Roth IRA asset types are deemed to be withdrawn (contributory basis first, then conversion and rollover basis, then Roth IRA earnings).

orphan plan. The IRS considers a plan to be an orphan, or abandoned, plan if there has been no contribution or distribution activity for 12 consecutive months, the plan sponsor no longer exists, or cannot be located.

outplacement. The practice of outplacing retirement plan or IRA assets by purchasing investments at another insured depository institution, primarily for the purposes of investment diversity and increased insurance coverage, is commonly referred to as “outplacement.”

paired plans. A standardized profit sharing and a standardized money purchase pension plan that are designed to operate together using the same basic plan document.

partial termination. A partial qualified retirement plan termination occurs when a significant percentage of employees participating in a plan no longer are allowed to participate because of a plan amendment or separation from service initiated by the employer. The portion of the plan covering those employees no longer eligible to participate is deemed terminated, and such employees become 100 percent vested in their plan balances.

payer. The payer is the bank, savings and loan association, credit union, brokerage firm, insurance company, or other financial organization that holds IRA or retirement plan assets and is responsible for submitting IRA and retirement plan income tax withholding.

periodic payment. Distributions that must be made in regular installment intervals, such as annuity payments, over a period of more than one full year are periodic. The intervals may be monthly, quarterly, or annually.

permitted disparity. When using the Social Security integration method to allocate employer contributions in qualified retirement, 403(b), or SEP plans, the difference between the excess contribution percentage and the base contribution percentage may not exceed certain established limits called the “permitted disparity.” Permitted disparity also is another term for the Social Security integration method of allocating employer contributions.

plan agreement. A plan agreement is the contract between a financial organization and an IRA owner that describes the IRA’s terms and conditions, such as contribution limits, investment restrictions, distribution requirements, etc.

PLR. See “private letter ruling” in this Glossary.

premium. A premium is an annuitant’s contribution to an annuity. For qualified retirement plans, a premium is the amount required to be paid to purchase life insurance as a plan investment.

238 • Glossary of Terms

prior-year contribution. A Roth or Traditional IRA contribution made between January 1 and April 15 of the current year for the prior tax year is called a “prior-year contribution.”

private letter ruling. The IRS issues a private letter ruling (PLR) to address a particular tax situation of a taxpayer. Only the taxpayer requesting the ruling may rely on it.

pro rata allocation. Qualified retirement or SEP plans may use a pro rata allocation formula to allocate employer contributions to each eligible participant in the same percentage, based on the individual’s compensation (e.g., each participant receives a contribution that represents five percent of annual W-2 wages).

profit sharing plan. A profit sharing plan is a defined contribution plan, typically allowing discretionary employer contributions from zero percent to 25 percent as determined by the employer on an annual basis.

prohibited transaction. A prohibited transaction is a transaction between an IRA, qualified retirement plan, or 403(b) plan and a party-in-interest (referred to as a disqualified person in the IRC) that is prohibited under ERISA Sec. 406 (and IRC Sec. 4975).

prohibited transaction exemption. The DOL grants prohibited transaction exemptions to allow certain transactions that would otherwise be considered prohibited transactions.

protected benefit. A protected benefit is a plan benefit found in Treas. Reg. 1.411(d)-4 that cannot be cut back or eliminated by a discretionary plan amendment.

prototype. A prototype is a specially designed IRA, SEP, SIMPLE, or qualified retirement plan document sponsored by an IRS-authorized entity. Prototype document sponsors offer IRS-approved prototype plan documents to employers to adopt.

QACA. See “qualified automatic contribution arrangement” in this Glossary.

QDIA. See “qualified default investment alternative” in this Glossary.

QDRO. See “qualified domestic relations order” in this Glossary.

QJSA. See “qualified joint and survivor annuity” in this Glossary.

QLAC. See “qualifying longevity annuity contract” in this Glossary.

QMAC. See “qualified matching contribution” in this Glossary.

QNEC. See “qualified nonelective contribution” in this Glossary.

QOSA. See “qualified optional survivor annuity” in this Glossary.

QP or QRP. See “qualified retirement plan” in this Glossary.

QPSA. See “qualified preretirement survivor annuity” in this Glossary.

qualified automatic contribution arrangement (QACA). A QACA is an automatic enrollment feature of an employer-sponsored retirement plan that meets all of the ACA requirements (see “Automatic contribution arrangements”) as well as other contribution, eligibility, and vesting requirements. A plan that meets the QACA requirements may be exempt from ADP, ACP, and top-heavy testing.

Glossary of Terms • 239

qualified charitable distribution (QCD). A QCD is an amount withdrawn from an IRA by an individual age 70½ or older that is donated directly to a qualified charitable organization. The distributed amount, up to an annual maximum of $100,000, is excluded from the individual’s gross income.

qualified default investment alternative (QDIA). A QDIA is a default investment in a participant-directed individual account plan that must meet certain notice and investment criteria. Selecting a QDIA allows the plan fiduciary to qualify for relief from investment performance liability for selecting plan investments. QDIAs are used for participants who have not selected investments (e.g., participants who are automatically enrolled in their plan).

qualified distribution. A Roth IRA distribution is a qualified distribution if the distribution represents assets that satisfy the five-year waiting period (beginning with the first taxable year for which the Roth IRA owner made a contribution) and one of the following events occurs: attainment of age 59½, disability, first-time homebuyer expenses, or death. Retirement plan designated Roth account qualified distributions are satisfied with the same general requirements, except first-time homebuyer expenses do not apply.

qualified domestic relations order (QDRO). A QDRO, created by the Retirement Equity Act of 1984, is a state court domestic relations order that relates to the payment of child support, alimony, or the division of qualified retirement plan or 403(b) plan assets. Such an order must meet certain requirements to be “qualified” and thus permit payment of a participant’s benefit to an alternate payee, including the participant’s spouse, former spouse, or dependent.

qualified hurricane distribution. Eligible retirement plan participants and IRA owners who suffered economic loss as a result of Hurricanes Harvey, Irma, and Maria in 2017 may request qualified hurricane distributions during certain periods of time. Individuals are subject to a maximum $100,000 withdrawal amount, receive favorable tax treatment, and may recontribute the amount to an IRA or retirement plan account within three years.

qualified joint and survivor annuity (QJSA). A QJSA provides a lifetime annuity payment to a qualified retirement plan or 403(b) plan participant who separates from service. When the participant dies, periodic payments will continue to a surviving spouse in a percentage determined in the plan agreement.

qualified matching contribution (QMAC). QMACs are employer contributions used to cover deficiencies in the 401(k) and 401(m) (i.e., ADP and ACP) nondiscrimination tests. These contributions may be conditioned on an employee’s deferrals, are nonforfeitable, and are subject to stringent withdrawal restrictions.

qualified nonelective contribution (QNEC). QNECs are employer contributions used to correct deficiencies in the 401(k) and 401(m) (i.e., ADP and ACP) nondiscrimination tests. These contributions are nonelective (i.e., cannot be conditioned on an employee’s deferrals), are nonforfeitable, and are subject to stringent withdrawal restrictions.

qualified optional survivor annuity (QOSA). A QOSA is an annuity 1) for the life of the participant with a survivor annuity for the life of the spouse that is equal to the “applicable percentage” of the annuity amount that is payable during the joint lives of the participant and the spouse, and 2) that is the actuarial equivalent of a single annuity for the life of the participant.

qualified preretirement survivor annuity (QPSA). A QPSA is a life annuity paid to a surviving spouse if the qualified retirement plan or 403(b) plan participant dies before plan distributions begin.

240 • Glossary of Terms

qualified reservist distribution. Certain qualified reservists, including National Guardsman, called to active duty can take penalty-free distributions from IRAs and from deferrals in IRC Sec. 401(k) plans, 403(b) plans, and certain pre-ERISA plans under Sec. 501(c)(18).

qualified retirement plan. A qualified retirement plan is an employee benefit plan that meets the requirements of IRC Sec. 401(a) or 403(a) and thus is eligible for special tax consideration.

qualified Roth contribution program. A qualified Roth contribution program is a type of after-tax salary deferral arrangement that can be included in IRC Secs. 401(k), 403(b), and governmental 457(b) plans. It provides plan participants the opportunity to defer some of their wages into the plan as Roth contributions and to withdraw qualified distributions tax free.

qualified wildfire distributions. Eligible retirement plan participants and IRA owners whose principal residence was located in the California wildfire disaster area during any portion of the period from October 8, 2017, to December 31, 2017, and who suffered economic loss as a result of the wildfires may request qualified wildfire distributions. To qualify, the distribution must occur on or after October 8, 2017, and before January 1, 2019. Individuals are subject to a maximum $100,000 withdrawal, receive favorable tax treatment, and may repay the distributed amount to an IRA or retirement plan account within three years.

qualifying longevity annuity contract (QLAC). A QLAC is an annuity contract that provides annuity payments to an account owner beginning at an advanced age and is purchased from an insurance company using assets in a qualified defined contribution plan, tax sheltered 403(b) plan, eligible governmental 457(b) plan, or IRA (other than a Roth IRA).

ratio percentage test. The ratio percentage test is one of the methods of testing for minimum coverage under IRC Sec. 410(b) in a qualified retirement plan. The percentage of nonHCEs benefiting under the plan must be equal to or greater than 70 percent of the HCEs benefiting under the plan.

RBD. See “required beginning date” in this Glossary.

REA annuity requirements. The Retirement Equity Act of 1984 (REA) generally requires that distributions to certain qualified retirement plan and 403(b) plan participants and beneficiaries be made in the form of a commercial annuity unless properly waived.

REA safe harbor plans. Certain types of defined contribution plans (e.g., profit sharing plans, 401(k) plans, or 403(b) plans) may be drafted to be exempt from the REA annuity requirements. These plans must meet specified conditions to qualify for this exemption.

recalculation. Recalculation is a method of calculating beneficiary single life expectancy payments in which a new divisor is obtained from the IRS Single Life Expectancy Table each year to calculate the beneficiary payment.

recharacterization. A recharacterization is the movement of current-year contributions, plus the net income attributable (NIA), from one type of IRA to another type of IRA. Recharacterizations allow IRA owners to “undo” their original contribution and to treat the contribution as if it were made to another type of IRA. Before 2018, IRA conversions and retirement plan rollovers to Roth IRAs also could be recharacterized.

remedial amendment period. A remedial amendment period is the time afforded to a plan to complete required plan amendments to retroactively comply with law changes.

Glossary of Terms • 241

required beginning date. For purposes of required minimum distributions, the required beginning date generally is April 1 following the year a Traditional IRA or SIMPLE IRA owner or a qualified retirement plan (QRP) or 403(b) plan participant reaches age 70½. Some exceptions apply.

required minimum distribution. Traditional and SIMPLE IRA owners and retirement plan participants generally must begin taking annual required minimum (RMDs) beginning for the year they turn age 70½. Some retirement plans may allow nonowners to delay beginning RMDs until retirement, and RMDs may begin later for balances that are part of a qualifying longevity annuity contract.

revenue procedure. The IRS issues revenue procedures to explain procedural matters or list the requirements to be followed in various IRS dealings. Revenue procedures also provide guidelines that the IRS uses in handling certain tax matters.

revenue ruling. A revenue ruling is a public IRS ruling that expresses the IRS’ views in specific situations. Individuals in an identical situation as presented in the ruling generally may rely upon these rulings.

revoked IRA. A revoked IRA is an IRA from which an individual has removed the total initial contribution within seven days of opening the IRA, thereby closing the plan.

RMD. See “required minimum distribution” in this Glossary.

rollover. A rollover is a reportable movement of cash or other assets between IRAs, between retirement plans, or between IRAs and retirement plans.

Roth IRA. A Roth IRA is a type of IRA that can receive only nondeductible (i.e., after-tax) contributions. A Roth IRA owner may be entitled to tax and penalty-free distributions, provided certain rules are met.

salary deferral. Certain types of plans (e.g., 401(k), 403(b), SIMPLE, and SAR-SEP plans) allow employees to elect to contribute part of their wages to the retirement plan rather than receiving the amount in cash.

salary reduction SEP (SAR-SEP). A SAR-SEP plan is a SEP plan that allows eligible employees to defer part of their pretax wages into IRAs rather than receiving cash. Effective January 1, 1997, employers may no longer establish new SAR-SEP plans. But SAR-SEP plans established before January 1, 1997, may continue to operate.

SAR-SEP. See “salary reduction SEP” in this Glossary.

saver’s tax credit. The saver’s credit is a nonrefundable income tax credit for contributions made to IRAs and retirement plans. Taxpayers with a limited amount of adjusted gross income may claim this credit.

savings incentive match plan for employees of small employers (SIMPLE). SIMPLE plans are simplified retirement plans for small employers, funded by employee deferrals and employer matching or nonelective contributions. A SIMPLE plan may be a SIMPLE 401(k) or SIMPLE IRA plan.

SDA. See “self-directed IRA” in this Glossary.

self-directed IRA (SDA). An SDA is a Traditional, Roth, or SIMPLE IRA that is opened at a financial organization with trust powers, a state FDIC-insured institution, a federal credit union, or a federally-chartered savings and loan or savings bank where the IRA owner is allowed a wider choice of investments within the IRA. Stocks, bonds, money-market funds, and mutual funds may all be found in a self-directed IRA at the choice of the IRA owner.

SEP. See “simplified employee pension” in this Glossary.

242 • Glossary of Terms

separate line of business (SLOB). These rules provide the criteria that an employer must meet to be eligible to treat various lines of business as qualified separate lines of business for various plan testing purposes.

SIMPLE 401(k) plan. A SIMPLE 401(k) plan is a plan with many 401(k) characteristics that operates under many of the governing rules of IRC Sec. 401(a), but incorporates the contribution, notice, vesting, and exclusive-plan rules of SIMPLE IRA plans.

SIMPLE IRA. A SIMPLE IRA is a special type of IRA to which only SIMPLE IRA plan contributions are made.

SIMPLE IRA plan. A savings incentive match plan for employees of small employers (SIMPLE) IRA plan is a retirement plan for small businesses that includes both employee and employer contributions, but does not include the same administrative burdens required for other retirement plans (e.g., nondiscrimination testing and plan-level reporting).

SIMPLE IRA summary description. Trustees of SIMPLE IRA plans must give an annual summary description to employers, who subsequently provide them to their employees. The summary descriptions must include the names and addresses of the employer and trustee, the plan’s eligibility requirements, plan benefits, the time and method of making employee elections, and the procedures and effects of withdrawals.

simplified employee pension (SEP). A SEP plan is a pension plan established by a business where contributions are deposited into participants’ Traditional IRAs and are tax-deductible by the employer. Any employer, including a sole proprietor with no employees, can establish a SEP for the benefit of all eligible employees.

SLOB. See “separate line of business” in this Glossary.

SMM. See “summary of material modifications” in this Glossary.

Social Security integration. Social Security integration (also called “permitted disparity”) is a method of allocating employer contributions under a qualified plan, 403(b) plan, or SEP plan based on the premise that employees with salaries above the taxable wage base (TWB) receive a smaller percentage of Social Security benefits. Therefore, additional contributions may be made to a qualified retirement plan for these employees to make up for this deficiency.

SPD. See “summary plan description” in this Glossary.

spousal IRA contribution. An IRA owner who does not have adequate compensation but whose spouse has adequate compensation may make IRA contributions based on the spouse’s income. This is commonly referred to as a “spousal IRA contribution.”

standardized plan. A standardized pre-approved qualified retirement plan is a plan written to satisfy various tax qualification requirements under the Internal Revenue Code and applicable revenue procedures.

substantially equal periodic payment. Substantially equal periodic payments are a series of IRA or qualified retirement plan distributions that are established according to the requirements of IRC Sec. 72(t), Notice 89-25, and Revenue Ruling 2002-62. If all requirements are satisfied, an IRA owner or plan participant who receives substantially equal periodic payments from her plan before reaching age 59½ will not be subject to the 10 percent early distribution penalty tax.

Glossary of Terms • 243

summary of material modifications (SMM). An SMM is a comprehensive, easily understood summary of any material changes made to qualified retirement plan provisions, features, or operations after adoption of the initial plan. Employers must distribute an SMM to all participants and beneficiaries within the time frame established by ERISA.

summary plan description (SPD). An SPD is a comprehensive, easily understood explanation of a retirement plan’s provisions, features, and operations. Employers must provide an SPD to all participants and beneficiaries within the time frame established by ERISA.

target benefit plan. A target benefit plan is a defined contribution plan with several characteristics of a defined benefit plan. Contributions generally are based on such factors as the employee’s age, years of service, and a projected benefit at retirement.

taxable wage base (TWB). The taxable wage base is the base salary amount, as indexed annually by the Social Security Administration, upon which the employer’s and employees’ Social Security obligation is determined.

tax-sheltered annuity (TSA). A TSA is an employer-sponsored retirement plan established under IRC Sec. 403(b). TSAs are available to certain public educational organizations and tax-exempt organizations.

Thrift Savings Plan (TSP). The Thrift Savings Plan is a type of retirement plan sponsored by the federal government. A TSP distribution may be eligible to be rolled over into an IRA or eligible retirement plan.

top-heavy plan. IRC Sec. 416 defines a top-heavy plan as a plan where the aggregate plan account assets of the key employees exceed 60 percent of the aggregate assets in the accounts of all employees.

transfer. For IRA purposes, a transfer is a tax-free, nonreportable movement of assets from one IRA to another, when the IRA owner does not have constructive receipt of the assets. For retirement plans, a transfer is a tax-free movement of assets, generally initiated by the employer, from one qualified retirement plan to another.

transmittal form. A transmittal form is a report summarizing how many forms are being submitted to the IRS. For example, IRS Transmittal Form 1096, Annual Summary and Transmittal of U.S. Information Returns, summarizes how many Forms 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., are being transmitted.

triggering event. A triggering event is an event described within the qualified retirement plan or 403(b) plan documents that generally must occur before a distribution of benefits to participants or beneficiaries may be made from the plan. Triggering events generally include attainment of normal retirement age, death, disability, plan termination, or severance from employment.

trustee. A trustee is a bank or savings and loan association, as defined in IRC Section 408(n), or any person who has the approval of the IRS to act as trustee.

TSA. See “tax-sheltered annuity” in this Glossary.

TSP. See “Thrift Savings Plan” in this Glossary.

TWB. See “taxable wage base” in this Glossary.

UBTI. See “unrelated business taxable income” in this Glossary.

244 • Glossary of Terms

unrelated business taxable income (UBTI). UBTI generally occurs when a plan receives income from 1) a plan-operated business, 2) property acquired or improved by the plan through debt financing, or 3) certain partnerships in which the plan owns an interest.

vesting. Vesting is the process by which benefits contributed on behalf of certain employer-sponsored retirement plan participants become nonforfeitable. The vesting percentage determines the amount available for distribution to participants upon termination of employment or any other triggering event.

volume submitter document. For PPA and earlier document cycles, volume submitter documents are submitted to the IRS for approval and can be adopted by numerous employers, but plan design restrictions that are normally placed on prototype documents are not applicable for volume submitter documents. For post-PPA document cycles, volume submitter plans become part of the IRS’ opinion letter program, under which nonstandardized plans contain the features of the former volume submitter plans.

withholding. IRA and retirement plan distributions generally are subject to withholding, which is a portion of a distribution that a financial organization or an employer withholds and sends directly to the federal, state, or local tax authority as partial payment of that individual’s tax liability for the year.

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IRA Opening Documents Log Sheet

Financial organization name ________________________________________________________________________

Client name _____________________________________________________________________________________

Address _________________________________________________________________________________________

_________________________________________________________________________________________

Telephone _______________________________________________________________________________________

IRA Type

Traditional

Roth

IRA Application

Date received _______________________________________

Date signed ________________________________________

Plan Agreement

Form used ________________________________________________ Revision date ___________________

Copy to IRA owner: Date _____________________________

Copy retained: Signed plan agreement

Signed acknowledgment that IRA owner received plan agreement

Disclosure Statement

Form used ________________________________________________ Revision date ___________________

Copy to IRA owner: Date _____________________________

Copy retained: Signed disclosure statement

Signed acknowledgment that IRA owner received disclosure statement (including financial disclosure)

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Financial Disclosure

Form used _________________________________________

Copy to IRA owner: Date _____________________________

IRA Revocation

IRA revoked within 7 days: Date revoked ________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

IRA Documents Amended

Plan agreement Revision date ________________ Date delivered ___________________

Disclosure statement Revision date ________________ Date delivered ___________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Plan agreement Revision date ________________ Date delivered ___________________

Disclosure statement Revision date ________________ Date delivered ___________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Plan agreement Revision date ________________ Date delivered ___________________

Disclosure statement Revision date ________________ Date delivered ___________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Plan agreement Revision date ________________ Date delivered ___________________

Disclosure statement Revision date ________________ Date delivered ___________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

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Withholding Election Log Sheet

Financial organization name ________________________________________________________________________

Client name _____________________________________________________________________________________

Address _________________________________________________________________________________________

_________________________________________________________________________________________

Telephone _______________________________________________________________________________________

IRA Type

Traditional

Roth

Withholding Election

Date ______________________________

Election: Waive withholding

Withhold 10%

Withhold more than 10% Amount ____________________

Withholding Election Change

Date ______________________________

Election: Waive withholding

Withhold 10%

Withhold more than 10% Amount ____________________

Date ______________________________

Election: Waive withholding

Withhold 10%

Withhold more than 10% Amount ____________________

Date ______________________________

Election: Waive withholding

Withhold 10%

Withhold more than 10% Amount ____________________

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IRA Reporting Activity Log Sheet

Financial organization name ________________________________________________________________________

Reporting year ___________________________________________________________________________________

Form 1099-R

Format used: Paper Electronic

Due to IRS: February 28, 2019 April 1, 2019

Date sent: ______________________ ______________________

Due to IRA owners: January 31, 2019 Date sent ______________________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Form 5498

Format used: Paper Electronic

Due to IRS: May 31, 2019 Date sent ______________________________

Due to IRA owners: May 31, 2019 Date sent ______________________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Fair Market Value Statement

Due to IRA owners: January 31, 2019 Date sent ______________________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

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Required Minimum Distribution Statement

Due to IRA owners: January 31, 2019 Date sent ______________________________

Included RMD amounts

Did not include RMD amounts

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________

Account Statement

Due to IRA owners: May 31, 2019 Date sent ______________________________

Notes: ____________________________________________________________________________________

__________________________________________________________________________________________

__________________________________________________________________________________________