Keanotes

New Federal Laws Affecting IRA Escheatment

By Heather Gabell, Director, Compliance

March 24, 2020

IRS Revenue Ruling 2018-17

Effective January 1, 2020, Revenue Ruling 2018-17 mandates that the escheatment of an IRA to the state as unclaimed property constitutes a designated distribution and is subject to a 10% federal tax withholding and a 1099-R reporting requirement.[1] While the Ruling continues to raise legal concerns, absent further guidance and/or an extension, from the IRS, holders must report the withholding on their unclaimed property reports.

NAUPA issued guidance in November 2019 related to the mechanics of reporting IRAs to the states, incorporating the NAUPA Standard Deduction and Withholding Code (“TW”) to represent the income tax withheld. If multiple deductions are reported, NAUPA instructs that the Tax Withholding code should take priority. Further, as there is only one deduction field available, any state and federal withholdings should be totaled and included.

Whether a state chooses to accept the TW code is up to each individual state, though many states have begun including a copy of the NAUPA guidance on their unclaimed property websites, and more than half of the states have reported that they will accept the code.

Note that the IRS Revenue Ruling is applicable to traditional IRAs only (not ROTH IRAs) and is not applicable to cash distributions from an IRA account. We recommend that you speak with your legal counsel and/or tax advisor prior to performing the withholding.

The SECURE Act

Signed into law on December 20, 2019 as part of the federal government’s last minute appropriations bill, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 went into effect on January 1, 2020 and also affects the reporting of IRAs as unclaimed property.[2]

Primarily, the SECURE Act increases the age at which an IRA owner must begin to take required minimum distributions (RMD) from age 70.5 to 72. If an IRA owner turned 70.5 on or before December 31, 2019, the RMD date remains April 1st of the year after the owner reaches age 70.5. If an IRA owner turned 70.5 on or after January 1, 2020, the RMD date is April 1st of the year after the owner reaches age 72.

Another noteworthy change is that the “stretch” IRA was eliminated such that most beneficiaries are required to withdraw all of the assets in their inherited accounts within 10 years of the IRA owner’s death. There are exceptions for “eligible designated beneficiaries,” who are permitted to stretch the RMDs over the course of their lifetime. Such beneficiaries include a surviving spouse, a minor child of the IRA owner (up until the age of majority), a disabled or chronically ill beneficiary, and beneficiaries that are no more than 10 years younger than the IRA owner.

The maximum age requirement for contributions to an IRA, which was previously age 70.5, was removed, such that an IRA owner may now contribute to an IRA even after the RMD date so long as he or she is receiving income. Lifting the age restriction on contributions means that we can expect to see more owner activity in IRA accounts, and arguably fewer accounts will become subject to escheatment.

Unlike most states’ retirement provisions, which refer to the RMD age as a trigger for escheatment, the states that have adopted a version of the Revised Uniform Unclaimed Property Act (RUUPA) namely UT, TN, IL, KY, ME, CO, NV, and CA (CA: ROTH only), specifically use “age 70.5” as a trigger date and do not reference RMD. This creates a conflict between those state laws and the new federal law. Keane is working alongside the industry groups to determine whether these RUUPA-like states will revise their retirement provisions to harmonize with the federal law.



[1] https://www.irs.gov/pub/irs-drop/rr-18-17.pdf, as extended by Notice 2018-90: https://www.irs.gov/ pub/irs-drop/n-18-90.pdf?_sm_au_=isVQ4j44RVN96pRRsGBF8K6L60NKt.
[2] https://www.congress.gov/bill/116th-congress/house-bill/3877.

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