Impact of Federal Laws and the IRS Revenue Ruling on IRA Escheatment
September 4, 2020
September 4, 2020
Signed into law on December 10, 2019 and effective on January 1, 2020, the Setting Every Community Up for Retirement Enhancement Act, or SECURE Act, affects the reporting of IRAs in several respects.
First, this new law increases the age at which an IRA owner is required to take a mandatory distribution from age 70.5 to age 72. To be technically correct, IRA owners are not required to begin taking required mandatory distributions until April 1st of the year following the year the owner turns age 72. However, the SECURE Act is applicable to required distributions made after December 31, 2019 for individuals who attain age 70.5 after such date. Note that the RUUPA states, with the exception of Vermont, specifically reference age 70.5 in their law and do not reference the RMD date.
The SECURE Act also eliminates the use of the stretch IRA, unless the beneficiary qualifies as a “designated beneficiary” (a surviving spouse, minor child, chronically ill or disabled beneficiary, or a beneficiary that is not more than 10 years younger than owner is). If the beneficiary is not a designated beneficiary and the owner dies before the RMD date in 2020, the assets must be fully distributed within 10 years of the owner’s death.
Finally, the SECURE Act removes the age limitation for contributions to an IRA. Now, owners can contribute to an IRA at any time, including past their RMD date. This means holders may start seeing additional activity on these accounts and, in turn, a decrease in the amount of accounts eligible to escheat.
Under the CARES Act, also known as the “Coronavirus Aid, Relief, and Economic Security (CARES) Act,” which became effective on March 27, 2020, the RMD requirement is waived for year 2020. This impacts unclaimed property in those states when the RMD date, or as the statutory provisions read, “date upon which the account owner is required take a distribution in order to avoid a tax penalty,” is the trigger date for escheatment. Operationally, this means that if the RMD date is in 2020, the RMD date is pushed back to 2021.
IRS Revenue Ruling 2018-17
Effective January 1, 2020, the escheatment of an IRA to the state constitutes a designated distribution that is subject to a 10% federal income tax withholding which must be reported to the IRS on a Form 1099-R. Operational concerns raised by holders were addressed in part by NAUPA at end of 2019, who advised that the TW code be used to represent the tax withholding on the unclaimed property report. Holders should note that the Revenue Ruling is applicable only to IRAs (and not to the cash distributions thereof) and does not apply to ROTH IRA accounts.