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ComplianceTax & AccountingAugust 24, 2021

IRA distributions made to a state’s unclaimed property fund: Withholding and reporting

Overview

Though neither the Internal Revenue Code (IRC) nor the Internal Revenue Service (IRS) address when assets held in an individual retirement account (IRA) may be considered abandoned property and sent to a state’s unclaimed property fund, Revenue Ruling 2018-17 addresses federal income tax withholding and reporting in the case of such distributions. The Revenue Ruling clarifies that these distributions are to be reported in an IRA owner’s or beneficiary’s name, even though the IRA owner or beneficiary does not benefit directly from the distribution.

Federal Income Tax Withholding

The Revenue Ruling specifies that when an income tax withholding election has not been made, under IRC Section 3405 federal income tax in the amount of 10 percent must be withheld on IRA nonperiodic designated distributions, including those remitted to a state’s unclaimed property fund.

Distribution Reporting

If a distribution of a portion or the entire amount an individual’s IRA is paid to a state’s unclaimed property fund it is a reportable distribution in the name and Tax Identification Number of the IRA owner or beneficiary. Therefore, Box 1 (Gross distribution), Box 2a (Taxable amount), Box 2b (Taxable amount not determined), Box 4 (Federal income tax withheld), and (Box 7) Distribution code(s) of IRS Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., will all be completed as if paid to the individual directly.

Conclusion

Revenue Ruling 2018-17 appears to be written specific to traditional IRAs and not simplified employee pension (SEP), Savings Incentive Match Plans for Employees of Small Employers (SIMPLE), or Roth IRAs. However, this may be a gateway ruling for application to distribution from SEP and SIMPLE IRAs to a state’s unclaimed property fund, with additional application to Roth IRA distributions, absent the withholding component.

For an opportunity to learn more about IRAs and other tax-advantaged accounts including Health Savings Accounts and Coverdell Education Savings Accounts, consider the Wolters Kluwer IRA Library or on-demand video training offered on a variety of topics. Go here to learn more about training opportunities available to you, or you can call us at 1-800-552-9408.
Randy Heidmann
Senior Specialized Consultant, Tax Advantaged Accounts, Compliance Center of Excellence
With more than 40 years of industry experience, Randy Heidmann has helped hundreds of financial organizations create, implement and maintain their tax-advantaged accounts programs.