Topic: Individual Retirement Accounts (IRAs)
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What is the law in Illinois with respect to naming contingent successor beneficiaries for inherited IRAs? One of our customers has an inherited IRA (not inherited from a spouse) and would like to name their spouse as the primary successor beneficiary and their children as contingent successor beneficiaries, but our system won’t let us input contingent successor beneficiaries.
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Unless your bank’s IRA plan documents prohibit such a designation, we believe that your customer should be able to name contingent beneficiaries for the inherited IRA. Illinois law recognizes beneficiary designations for retirement accounts, and Illinois courts have confirmed that contingent beneficiaries should be accorded the same treatment as primary beneficiaries in other contexts. Accordingly,…
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We have a customer (“M”) who died in 2017 at the age of 53. M had an IRA that named one primary beneficiary and no contingent beneficiaries. The primary beneficiary died prior to M’s death and no other beneficiaries were named. The IRA documentation provides that if M dies with no beneficiaries, the IRA funds shall be paid to M’s estate. M’s relative (“J”) informed the bank that they were going to be the executor of M’s estate, but J died before this occurred. As far as we know, an estate has not been opened for M. The executor of J’s estate provided us with their letters of office and informed us that M’s IRA funds should be paid to J’s estate. Can you confirm that absent additional documentation, our bank should not pay M’s IRA funds to J’s estate? Also, how should we handle M’s IRA funds, since their estate has not been opened?
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Based on these facts, we do not believe the executor of J’s estate is entitled to receive the funds in M’s IRA account without additional documentation establishing that J’s estate is the rightful beneficiary of M’s estate. A designated beneficiary of an IRA must be designated the IRA’s beneficiary as of the date of the…
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Our bank was recently set up for backup tax withholding in Illinois for employee payroll, but not for IRAs. We contacted the Illinois Department of Revenue to determine how we can set up withholding for IRA distributions, but they were unable to provide us with any guidance. Can you confirm whether Illinois taxes retirement income?
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Illinois does not tax retirement income, including distributions from IRAs and Roth IRAs. Consequently, we do not believe that any state tax withholding is necessary for IRA distributions in Illinois. For resources related to our guidance, please see: Illinois Department of Revenue, Q&As, Does Illinois tax my pension, social security, or retirement income? (“Illinois does…
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We transferred an individual retirement account (IRA) in April of last year to a new custodian, and we did not take out a required minimum distribution (RMD) before the transfer. We did send a notice of the RMD to the customer, and also to the IRS on Form 5498. The customer did not instruct us to withdraw the RMD for that year. The new custodian has asked us to correct the RMD issue. What needs to be done?
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Our understanding is that it was your customer’s responsibility to withdraw the RMD, not your bank’s (given that the customer did not request withdrawal of the RMD). The IRS requires the custodian of an IRA as of December 31 of a calendar year to provide a statement regarding the RMD to the IRA owner by…
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Our bank holding company’s shares are privately held, and some of our shareholders hold their shares in self-directed IRAs. They are having difficulty finding custodians that are willing to hold these shares, since they don’t have a published value. Can our bank serve as custodian for these IRAs?
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While we are not experts in the complex tax laws governing individual retirement accounts (IRAs), we believe that this arrangement would entail significant risk for your bank. By serving as custodian for a self-directed IRA, your bank, even if not engaging in a fiduciary relationship with the IRA, would be a “disqualified person” for providing…
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We have a deceased customer who had held a CD and an IRA with three beneficiaries, two of whom have come to the bank to open inherited IRAs. The third beneficiary lives out-of-state and does not want to travel to the bank to set up his inherited IRA in person. This beneficiary’s attorney told us that all he must do is provide the bank with a notarized letter of direction. Is this accurate? The CD also has a payable on death (POD) beneficiary who lives out-of-state and does not want to travel to our bank. What are our options for these beneficiaries?
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We are not aware of any laws or regulations that would prevent your bank from remotely opening an inherited IRA or remotely distributing the proceeds of a POD account. Since the out-of-state IRA beneficiary will be a customer of your bank, you should follow your customer identification program (CIP) procedures for verifying the identity of…
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One of our business customers set up several 401(k) accounts several years ago. We opened the accounts as traditional IRAs, named in the company’s name. The company’s owner signed the signature cards. The only document showing the employee’s signature is a form provided by the company showing that the employee marked that they want to hold the IRA at our bank. Is that correct? We are concerned that one of the employees took an early distribution for a family funeral expense — and because the company is set up as the IRA’s primary owner, we send an IRS 1099-R form to the company as well as the employee.
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If these accounts truly are 401(k) accounts, they should not have been set up as Traditional IRAs. Because vastly different tax rules and reporting requirements apply to these types of accounts, it is important to correctly identify the accounts as 401(k) accounts rather than IRAs in your account records. The 1099-R form used to report…
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We have a deceased customer who had an IRA with her three sons named as beneficiaries. We need to open inherited IRAs for the sons, one of whom is incarcerated. Our Customer Identification Program (CIP) requires a primary and secondary form of identification. What steps do we need to take to verify the identity of an incarcerated individual? We were able to pull up a photograph of the incarcerated son on the Department of Corrections website using his inmate identification number. What more should we do? Our CIP does not cover this situation.
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We believe you may rely on the information posted on the Illinois Department of Corrections’ (IDOC) website, which is drawn from government records on file with the IDOC, for one form of government-issued identification for purposes of your customer identification program (CIP). Since your CIP policy requires two forms of government-issued identification, you may wish…
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We have been contacting individual retirement account (IRA) owners and beneficiaries in preparation for reporting unclaimed property on November 1. We have narrowed down the list of inactive IRAs to a handful for which the owner or beneficiary has not returned our letters or calls. The owners are under the age of 70½, and we have not had any mail returned undeliverable. Should we report these accounts as unclaimed property?
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No, we do not believe that you should report an IRA as unclaimed property before the owner has died or reached the age of 70½, and mail has been returned as undeliverable. The Illinois Revised Uniform Unclaimed Property Act (Illinois RUUPA) requires tax-deferred retirement accounts to be reported and remitted to the Treasurer on the…
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In the new Illinois unclaimed property law, the section regarding tax-deferred retirement accounts references a particular date: “one year after the date of mandatory distribution following death if the Internal Revenue Code requires distribution to avoid a tax penalty to the holder. . . .” What is that date?
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Our understanding is that the “date” referenced in that section is the date on which the deceased owner’s beneficiaries must take their first distribution from the IRA — whether the distribution is a full distribution of the account or the first of many periodic requirement minimum distributions (RMDs). The Illinois Revised Uniform Unclaimed Property Act…