ComplianceTax & AccountingJune 06, 2018

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

Overview

On May 29, 2018, the Internal Revenue Service (IRS) issued Revenue Ruling 2018-17, addressing how custodians and trustees of traditional individual retirement accounts (IRAs) administer distributions made to a state’s unclaimed property fund. The Revenue Ruling addresses the application of federal income tax withholding and 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 part or all of an individual’s interest in an 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.

Effective date

A custodian or trustee will not be treated as failing to comply with the withholding and reporting requirements of this Revenue Ruling with respect to distributions taken before the earlier of January 1, 2019, or the date it becomes reasonably practicable for an IRA custodian or trustee to comply with these requirements.

Conclusion

After much industry conjecture on this topic for many years, we have a withholding and reporting resolution. The Revenue Ruling 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.

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.