Topic: Individual Retirement Accounts (IRAs)
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We plan to start offering health savings accounts (HSAs), initially to employees, and later to the public. Do we need to list the bank as custodian on HSAs? Do we need to list the bank as a custodian on individual retirement accounts (IRAs)?
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We recommend consulting with a tax professional, but in our view, your bank can serve as either a custodian or trustee of an HSA, but it must serve as a trustee of an IRA. Under the Internal Revenue Code and IRS guidances, an HSA is a “trust” that must be established with a “qualified trustee”…
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We have a customer who requested a direct rollover from their 401(k) account to an IRA with us. We just received a letter from the customer’s employer stating that certain funds were not eligible for the rollover and must be returned. The employer used Distribution Code G to identify the direct rollover on its 1099-R Form. How do we code the amount on our Form 5498 to reflect the return?
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We recommend consulting with an accountant or tax professional for guidance on this issue, but our understanding is that Form 5498, which is filled out by banks as IRA trustees or custodians, does not use distribution codes. The distribution codes (such as Code G for direct rollovers) are used in the 1099-R Form, which is…
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Can a customer change her IRA beneficiaries to designate two children and a supplemental trust in equal shares?
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Yes, an IRA owner can name more than one beneficiary, and trusts may be beneficiaries. To effect the change, the owner should fill out a beneficiary change form, a sample of which is included in our resources below. For resources related to our guidance, please see: IRS Publication 590-B — Distributions from Individual Retirement Arrangements (IRAs)…
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We offer traditional and Roth individual retirement accounts (IRAs). We provide general information about the types of IRAs we offer, and the customer chooses which type of IRA they will be opening. We do not charge a fee or commission when an IRA account is opened, although we may charge a fee when the IRA account is closed, for example when it is rolled over to another institution. Are we subject to the Department of Labor’s Fiduciary Rule?
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No, we do not believe that your bank is subject to the Fiduciary Rule in the circumstances you have described. The Fiduciary Rule’s revised definition of a “fiduciary” greatly expands the scope of the rule to include any person who (1) renders investment advice (2) for a fee. The rule should not apply when your…
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We have several questions about the Department of Labor’s (DOL) Fiduciary Rule. We offer CD IRAs and health savings accounts (HSAs). We don’t collect any custodial or periodic fees for these accounts. Are HSAs covered by the rule? How should we handle distributions from our CD IRAs? Can we refer our customers to our wealth management department (without compensating employees for these referrals)?
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The DOL rules expressly include health savings accounts in the definition of an IRA, but the new Fiduciary Rule will apply only if your bank is providing “investment advice” (as defined by the new rule) for “compensation” (as defined by the rule) in connection with the HSAs. Similarly, the Fiduciary Rule could apply to distributions…
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How will the Department of Labor’s Fiduciary Rule affect our bank’s trust department? Our trust department serves as custodian for self-directed IRA trust accounts and charges the beneficiaries a flat annual fee. We do not provide investment advice; the beneficiaries direct the IRA’s investments. When directed by a beneficiary, our trust department occasionally purchases shares of mutual funds from companies that are not affiliates of the bank. Two of the companies sent us letters stating that they aren’t considered investment advice fiduciaries.
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Whether your bank is subject to the new Fiduciary Rule is a very fact-specific question. Even without providing advice on specific investments, your bank’s trust department could be considered a “fiduciary” simply because it makes an investment recommendation to an IRA beneficiary. The rule defines the term “recommendation” very broadly, including in its definition any…
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We have an IRA customer who passed away. The named IRA beneficiary was a trust, and the trustee has requested a lump-sum distribution of all IRA funds. Do we make the check out to the IRA beneficiary, which is the trust, or to the trust’s beneficiaries?
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You should make the check payable to the trust, which is the IRA's beneficiary (an IRA beneficiary may be any person or entity, including a trust). Also, when making the distribution to the trust, keep in mind that the IRS rules require you to use the name and tax identification number of the trust, not…
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A customer had a pension plan in Oregon that she rolled over into a Roth IRA at our bank last year. She received three distributions from that IRA last year. However, the customer just received a 1099 R notice from the IRS stating that she failed to pay the taxes on the pension prior to the rollover. A representative from our bank’s core processor told us the best way to handle this situation is to wipe out the Roth IRA as if it didn’t happen and start over with a traditional IRA. Is that permissible?
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As we understand the facts, we do not believe that the bank should become involved in determining the propriety of the customer’s handling of the rolled over IRA. It is not the bank’s obligation to determine whether a customer is correctly establishing an IRA account when the account is opened. If the customer subsequently is…
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Have you heard any further information about the forthcoming Department of Labor fiduciary rule? You originally provided guidance to us about the rule on October 11, 2016.
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Since we spoke about this issue in October, the Department of Labor has released FAQs on its fiduciary rule, including one Q&A addressing customer referrals to bank-affiliated broker-dealers under the “Best Interest Contract” exemption to the rule. However, this exemption still is considered too narrow by some, and its recordkeeping and contract compliance requirements remain…
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We have an IRA customer who passed away last year. He named his five children as beneficiaries. They want to know whether they have to break down the IRA into five inherited IRA’s — one for each beneficiary.
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No, we are not aware of any requirement that multiple IRA beneficiaries must open separate inherited IRA accounts, but the IRS rules permit them to do so at any time. For resources related to our guidance, please see: IRS Publication 590-B — Distributions from Individual Retirement Arrangements (IRAs) (2015) (“A single IRA can be split into…