Image alt tag

Error!

There was a problem contacting the server. Please try after sometime.

Sorry, we are unable to process your request.

Error!

We're sorry, but the Insights and Intelligence Tool is temporarily unavailable

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Error!

We're sorry, but the Literature Center checkout function is temporarily unavailable.

If this problem persists, or if you need immediate assistance, please contact Customer Service at 1-888-522-2388.

Tracked Funds

You have 0 funds on your mutual fund watch list.

Begin by selecting funds to create a personalized watch list.

(as of 12/05/2015)

Pending Orders

You have 0 items in your cart.

Subscribe and order forms, fact sheets, presentations, and other documents that can help advisers grow their business.

Reset Your Password

Financial Professionals*

Your password must be a minimum of characters.

Confirmation Message

Your LordAbbett.com password was successully updated. This page will be refreshed after 3 seconds.

OK

 

Retirement Perspectives

In the wake of the latest ruling from the IRS, here’s a guide to rules about escheatment.

Planning for retirement is challenging, especially as the myriad of rules and laws are complex and change frequently. Due to this complexity, a lot of savers, especially during the accumulation phase, follow the common recommendation of “set it and forget it”, “once and done,” or “stay the course.” Adhering to this game plan, however, without paying close attention to new and/or changing state laws, could produce harmful repercussions for retirement savers in some states.

On May 29, 2018, the Internal Revenue Service published Revenue Ruling “Withholding and Reporting with Respect to Payments from IRAs to State Unclaimed Property Funds.” The IRS addressed the federal tax withholding and reporting requirements associated with the escheatment of an IRA to the state as unclaimed property. Further, the IRS ruled that escheatment will be treated as a “designated distribution” to the IRA owner. The IRA is treated as a non-periodic payment subject to 10% tax withholding reported on Form 1099 by the IRA custodian as a distribution (to the IRA owner). In other words, the IRS (via the Revenue Ruling) made the case that the transfer of unclaimed IRA funds to a state constituted a designated distribution subject to federal income tax withholding. Notably, the ruling applies only to traditional IRAs (including rollovers from qualified plans), thus Roth IRAs, SEPs, and SIMPLE IRAs are excluded.  

Escheatment laws generally (although there is some disagreement) do not apply to 401(k) and other qualified plans, as these accounts receive escheatment protection through Employee Retirement Income Security Act (ERISA). Thus, if escheatment is a concern, it may be wise to leave the assets in a qualified plan.

All states generally have laws that require financial organizations to report abandoned and unclaimed property after a period of time. The time period for property to be reported to the state is typically three to five years after the property has been deemed to be either abandoned or unclaimed. Time frames vary by state and also vary by the type of unclaimed property.

In recent years, state legislatures have been looking for new revenue streams as officials grapple with budget shortfalls. Now state governments are targeting the $9 trillion in Individual Retirement Accounts (IRAs) held by Americans (as of March 31, 2018), by expanding and updating the definition of escheatment.

What, exactly, is escheatment? It allows a state government to claim abandoned property. Escheatment laws were created to ensure unclaimed/abandoned property did not remain unclaimed for lengthy periods of time. Escheatment usually requires a certain period of time to pass before property is deemed “abandoned.”  Lawmakers have quietly been making the period of inactivity shorter, from five years to three years, for the property to be classified as abandoned. Translation: Beware if you, your spouse, or other family member has a traditional IRA that is not active.

States, under certain circumstances (based on state law), have the power to escheat an individual’s IRA for which there is no owner. There are a few questions and concerns when it comes to escheatment of IRAs. By design, IRAs are long-term investment vehicles designed first and foremost for retirement income, so these savings plans are more likely to have less activity than other financial accounts (e.g. bank accounts, brokerage accounts, etc.). It’s due to this lesser activity that states historically have treated IRAs differently when it comes to being escheated. Fast forward to today: escheatment is another in a long line of revenue raisers for state governments.

Traditionally, unclaimed property laws gave the owner three years after IRA required minimum distributions (RMDs) would have started (e.g., age 70½). In other words, a period of inactivity would not begin until an individual turns 70½. On its own failure to take RMDs would be a big problem, as investors would be subject to a 50% penalty tax. Now, a retiree may also face the forfeiture of his or her nest egg.

Roth IRAs, which are not subject to lifetime RMDs, typically are not included in the aforementioned rule in many states. Therefore, Roth IRAs could be more at risk for escheatment. We urge you to review escheatment laws in your state of domicile with an experienced tax professional or attorney.

An IRA that has sat idle (e.g., no activity) for a period of time no longer has an owner, and therefore, is now considered abandoned property subject to escheatment. How is it determined that an IRA has no owner? Again, it depends on state law. Generally, there is a formal process for an IRA custodian to escheat an IRA. Readers of this column are aware that IRA custodians have different processes and procedures for many IRA transactions (e.g. recharacterization, Roth conversions, disclaimers, etc.)—now add escheatment to this list.  I suggest contacting your IRA custodian to familiarize yourself with their IRA escheatment process.

What happens after your IRA has been escheated?
The good news is your IRA account is not lost forever. In fact, most states have a step-by-step process to reclaim abandoned property. The not-so-good news: the IRA owner faces  limited choices  upon being reunited with their account. The choices are: (1) keep the assets as non-IRA account (e.g. other savings account) or (2) roll the funds back into an IRA. Most people (especially younger investors) would logically choose the latter: roll the funds back into an IRA to retain tax-deferral status. This is not nearly as simple as it seems. Why? The owner usually reclaims their assets well after the 60-day rollover period has passed. Therefore, to receive rollover relief, the owner would need to receive approval from the IRS for a “late” 60-day rollover by filing a Private Letter Ruling (PLR). However, obtaining a PLR is  burdensome, time consuming, and pricey (an estimated $10,000). Escheatment is not included in the IRS Revenue Procedure 2016-47 “Waiver of 60-Day Rollover Requirement” lists of reasons for self-certification.

Steps to avoid escheatment

  • Be engaged. Review your accounts (especially IRA Rollover accounts for which there are no activity) with regularity. For example, keep your email and mailing address current, log into to your online account regularly.
  • Review beneficiary forms regularly. Notify your heirs that they have been named beneficiary.  Inherited IRAs can also be subject to escheatment.
  • Discuss escheatment laws with a tax professional.
  • Discuss escheatment process with your IRA custodian.

 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

GLOSSARY OF TERMS

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

A SIMPLE IRA plan is an IRA-based plan that gives small-business employers a simplified method to make contributions toward their employees’ retirement and their own retirement. Under a SIMPLE IRA plan, employees may choose to make salary reduction contributions and the employer makes matching or nonelective contributions. All contributions are made directly to an individual retirement account (IRA) set up for each employee (a SIMPLE IRA). SIMPLE IRA plans are maintained on a calendar-year basis.

A simplified employee pension plan (SEP IRA) is a retirement plan specifically designed for self-employed people and small-business owners. When establishing a SEP-IRA plan for your business, you and any eligible employees establish your own separate SEP-IRA; employer contributions are then made into each eligible employee’s SEP IRA.

Qualified Retirement Plan—This is a savings plan that is allowed certain tax advantages because it meets criteria spelled out in the IRS Code and in the Employee Retirement Income Security Act [ERISA] of 1974. Employers can take tax deductions for any contributions they make to an employee's account. Employee contributions and investment returns are tax-deferred until withdrawn. Contribution limits apply, as do penalties for early withdrawal.

401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an aftertax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

Required minimum distribution (RMD) is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account when you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner.

An IRA rollover may involve the application of fees and charges to the investor. A rollover is the process of moving your retirement savings from your retirement plan at work (401(k), profit-sharing plan, etc.) into an Individual Retirement Account (IRA). 

The Summary Plan Description (SPD) issued by plan administrators explains participants’ and beneficiaries’ rights, benefits, and responsibilities under the plan in understandable language. The SPD includes such information as: the plan’s requirements regarding eligibility; a description of benefits and when participants have a right to those benefits; procedures regarding claims for benefits and remedies for disputing denied claims; and the rights available to plan participants under the Employee Retirement Income Security Act (ERISA).

RELATED TOPICS

About The Author

image

Please confirm your literature shipping address

Please review the address information below and make any necessary changes.

All literature orders will be shipped to the address that you enter below. This information can be edited at any time.

Current Literature Shipping Address

* Required field