Topic: Individual Retirement Accounts (IRAs)
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What IRS form should we complete if we closed an IRA account but still owe the customer unpaid interest? We would like to mail the customer the unpaid interest.
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We believe you may need to file a corrected Form 1099-R that includes the unpaid interest. The IRS requires a Form 1099-R filing when making a distribution of $10 or more from any individual retirement arrangement. The form contains a box to indicate whether a distribution was a total distribution that closed out an account.…
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A customer who opened a beneficiary IRA at our bank believes that she needs to take a required minimum distribution (RMD). The original IRA owner died after 2020, before reaching the age of 70, and the beneficiary also has not yet reached the age of 70. The beneficiary is only a few years younger than the deceased owner, is not their spouse or minor child, and is not disabled or chronically ill. Is the beneficiary required to take an RMD at this time?
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We believe that the beneficiary would be considered an “eligible designated beneficiary” under recent changes to the Internal Revenue Code, which means they have two options for taking distributions from an inherited IRA. As described in more detail below, the option they choose determines whether and when they must begin taking RMDs. The Setting Every…
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We have a customer who is a designated beneficiary (but not an “eligible designated beneficiary”) of an inherited IRA. The IRA owner was the customer’s father, who died in 2020 after taking his required minimum distribution (RMD) for 2020. Our understanding was that under the 2021 IRA rules, our customer had ten years to empty the inherited IRA — either by taking annual distributions or a lump sum before the ten-year deadline. However, we recently viewed a webinar indicating that when an IRA owner dies in 2020 (or later) after reaching their required beginning date for taking RMDs, their designated beneficiary must take annual distributions and cannot wait to take a lump sum. Will our customer be penalized for not taking an annual distribution in 2021, and must they begin taking annual distributions in 2022?
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No, we do not believe your customer will be penalized for not taking a distribution in 2021 or be required to begin taking annual distributions in 2022. We do not believe that the IRS’s IRA rules require designated beneficiaries to take annual distributions from inherited IRAs. IRS Publication 509-B for use in preparing 2021 returns…
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A deceased customer’s non-spouse IRA beneficiary came into our bank to close out the IRA. On request, we cut a check to the beneficiary and coded it as a death distribution in our system. The beneficiary’s bank had misinformed them that they should obtain and deposit the check to roll the funds over into a beneficiary IRA account and the beneficiary’s bank, which they did. This bank now realizes that it should have done a trustee-to-trustee transfer of the funds. It wants to send us transfer papers and have us change the coding in our system from a death distribution to a trustee-to-trustee transfer to avoid us issuing a form 1099-R reflecting the death distribution, which would result in a sizeable tax burden for the beneficiary. Can we make this change if the other bank agrees to sign a hold harmless agreement protecting our bank?
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No, we do not recommend signing the transfer papers or changing the coding in your system. We also caution that a hold harmless agreement might not protect you from potential IRS penalties if you purport to make a trustee-to-trustee transfer of the IRA funds after making a death distribution to the beneficiary. We spoke with…
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A customer with an individual retirement account (IRA) at our bank passed away. The IRA has three beneficiaries, but one of them is only fifteen years old. Do we need to determine whether the minor has been appointed a guardian by will, court proceeding, or state law before making a lump sum distribution? Is it sufficient for the parent to sign all necessary IRA documents along with the minor before making the distribution?
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Yes, we believe it would be advisable to ask whether the minor has been appointed a guardian by will, court proceeding, or state law before making a lump sum distribution. Additionally, you should review the IRA’s governing instrument to ensure that the IRA owner did not appoint a custodian or guardian to manage the funds…
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We are a former savings and loan association and have been using IRA trustee documents for decades. However, we are technically a custodian, not a trustee, since we do not have investment authority. Should we be using custodial agreements and other documents instead of trustee documents?
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Yes, we believe that your bank should be using custodial agreements and other documents instead of trustee documents since your bank is not a trustee with investment authority. Under the Illinois Trust Code, trustees have a duty to invest and manage trust assets as a prudent investor would. Without investment authority, your bank cannot fulfill…
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When a customer opens an individual retirement account (IRA), should they receive disclosures regarding funds availability and substitute checks under Regulation CC and electronic fund transfers under Regulation E?
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No, we do not believe these disclosures are required for IRAs. Regulation CC governs the availability of funds for transaction accounts and the holds banks can place on checks. Its disclosure requirements related to funds availability and substitute checks do not apply to IRAs, which are excluded from Regulation CC’s definition of a “transaction account.”…
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Regarding unclaimed property, what is the dormancy rule for automatically renewing certificates of deposit (CDs)? Are they considered dormant if there is no contact for three years after the initial renewal? If a customer receives interest checks that are being cashed, is that considered “contact”? Also, would individual retirement accounts (IRAs) be considered dormant three years after the first required minimum distribution if there has been no contact?
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Unclaimed Certificates of Deposit Absent any qualifying activity for the account, an automatically renewing time CD must be treated as unclaimed property once three years have passed from the first renewal date. The Illinois RUUPA does provide that automatically renewable accounts will not be considered unclaimed property if “3 years after its initial date of…
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An IRA customer died, leaving her trust as her beneficiary. The deceased customer’s son is the trustee of the trust, and he requested that the funds be transferred to a non-IRA savings account for the trust that he had opened. We closed the IRA as a death distribution and cut a cashier’s check payable to the trust. Since the IRA was closed as a death distribution, and not as an internal distribution to an IRA product, will the 1099-R that we issue have tax implications?
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Yes, the trustee’s decision to place the IRA funds in a savings account will have tax implications, although we are not qualified to address exactly what those tax implications will be. Generally, when an IRA is distributed to a beneficiary, the beneficiary must roll over the distribution into a new IRA within sixty days of…
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Under the new unclaimed property law, when determining which individual retirement accounts (IRAs) we have to report as unclaimed property, do we have to do anything beyond checking that IRA customers over the age of 70½ have distributions to confirm that the accounts are active? Do we have to look into IRAs held by customers under that age?
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Yes, we recommend at least widening your search to also include inherited IRAs for which the mandatory distribution date has begun. The Illinois Revised Uniform Unclaimed Property Act (Illinois RUUPA) requires tax-deferred retirement accounts, including IRAs, to be reported and remitted as unclaimed property on the later of: Three years after the date that a…