Deposit and IRA Document Suite (DIDS)

An IRA establishment document (i.e., an IRA agreement), either trust or custodial, is used to create a contractual agreement between a credit union and an individual. When an individual signs an IRA agreement, he/she agrees to act per the contractual terms of the IRA and to adhere to the policies and procedures of the credit union. For this reason, when establishing an IRA, the rules require that a credit union provide an individual with a current establishment document, which generally includes an IRS model agreement (i.e., Form 5305 series document) or some other approved agreement. At the time of this writing, the traditional and Roth IRA IRS model agreements have an April 2017 revision date. However, it is worth noting that the IRA will eventually update each of the model agreements because of the significant changes included in the SECURE Act.

In addition to the Form 5305 series document that an IRA custodian/trustee must provide an individual when establishing an IRA, the rules require an IRA custodian/trustee to provide a plain-language disclosure explaining the rules in an easy to understand format. An IRA custodian/trustee may provide a new IRA owner with IRS Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs), and IRS Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs) to fulfill this disclosure requirement. But doing so could be confusing as information that is irrelevant to the specific IRA type would be included. For this reason, IRA custodians/trustees typically rely on their forms compliance provider to include a disclosure specific to the IRA type in the IRA establishment package.

Changes in the law and subsequent changes to the IRS’s model IRA documents often require an amendment of all existing IRAs. Additionally, an IRA custodian/trustee could change its IRA agreement, policies, or procedures that could require amending existing IRAs. Generally, an amendment is a change to the IRA agreement, the plain-language disclosure statement, or both. Changes requiring an amendment to an IRA agreement may also require amending pertinent sections of an IRA’s plain-language disclosure statement. In this situation, Treasury Regulation Section 1.408-6 requires an IRA custodian/trustee to provide an updated IRA agreement (including an updated plain-language disclosure statement) no later than 30 days after the later of the date on which the amendment is adopted or becomes effective. However, the IRS generally specifies an amendment deadline for IRA agreements.

Occasionally, the IRS issues regulations or other guidance that does not affect the IRS Form 5305 series document(s) but does impact an IRA’s plain-language disclosure statement. In this situation, it may also be prudent to send an amended disclosure. One such circumstance for making an early amendment to the disclosure statement that arose from the SECURE Act affects traditional IRAs if an IRA custodian/trustee chooses to allow individuals on or after age 70½ to make regular contributions for such years. Even though this provision is in direct conflict with the current IRS model agreement (i.e., IRS Forms 5305 and 5305-A) until the IRS updates it, it can be allowed only by adding this provision to the disclosure statement through an amendment per IRS guidance.

Generating the required reports in an IRA beneficiary’s name and SSN/TIN may require an IRA custodian/trustee to create a separate account for each beneficiary (i.e., beneficiary IRA, subaccount, etc.) in its data processing system. Please note that some data processing systems may not require this. Additionally, it is generally unnecessary for an IRA custodian/trustee to interact with IRA beneficiaries when creating beneficiary IRAs in its data processing system. Again, the primary purpose for a custodian/trustee to create a separate account for each beneficiary, in this case, is to have a method/means by which it can complete the necessary reporting for each beneficiary.

Some examples of beneficiary IRA titling include:

• Justin Smith, as a beneficiary of Lori Smith, IRA
• Habitat for Humanity, as a beneficiary of Lori Smith, Roth IRA
• Justin Smith Trust, as a beneficiary of Lori Smith, IRA

After an IRA custodian/trustee creates a beneficiary IRA, it moves the beneficiary’s allocated share from the decedent’s IRA to the beneficiary IRA, which is not reportable (i.e., a nonreportable transfer). It is from the beneficiary IRA that the custodian/trustee then administers death distributions and completes IRS Form 5498 and FMV reporting, etc.

A common misunderstanding among many IRA custodians/trustees is that a beneficiary must sign an IRA establishment document in conjunction with creating a beneficiary IRA in its data processing system. Neither the tax law nor regulations require that a beneficiary execute any documentation when an IRA custodian/trustee creates a beneficiary IRA in its data processing system. However, the policies of the custodian/trustee may necessitate it.

Transfer or rollover are the two methods by which an individual can move assets between IRAs of the same type (i.e., traditional IRA to another traditional IRA or a Roth IRA to another Roth IRA). A common thread these transactions share is that if handled properly, IRA assets will retain their tax-deferred status when moved from one IRA custodian/trustee to another. On a side note, simplified employee pension (SEP) contributions are made to traditional IRAs, so essentially these deposits fall into the “traditional IRA-to-traditional IRA” movement of assets. Furthermore, from an IRA-to-IRA transfer or rollover perspective, a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA can be moved via transfer or rollover to another SIMPLE IRA before the SIMPLE plan participant/SIMPLE IRA owner meets two years of participation, and to another SIMPLE IRA or a traditional IRA after two years of participation is met.

IRA-to-IRA transfer

An IRA-to-IRA transfer is the direct movement of assets between “like” IRAs. If done by check (versus electronically), the check is made payable to the receiving organization as custodian (if the receiving organization acts as a custodian) or trustee (if the receiving organization serves as a trustee) for the individual’s traditional (or Roth) IRA, depending on the request. Per IRS Revenue Ruling 78-406, a transfer is a nonreportable movement of IRA assets since the IRA owner may not have “control” of the assets (i.e., the transfer is only negotiable as a deposit to the receiving IRA). There is no IRS reporting when completing an IRA-to-IRA transfer correctly.

IRA-to-IRA rollover

In addition to moving assets between “like” IRAs via transfer, an IRA owner can move assets using the rollover process. However, the difference here is that the IRA owner has control of the assets. In this case, the process begins with an IRA owner requesting a distribution by completing an acceptable distribution request form or following some other custodian/trustee-approved process. Upon receiving assets from an IRA, the IRA owner generally has 60 days to redeposit a portion of, or all, the assets to the same IRA or another IRA of the same type. Doing so will avoid any income tax that would otherwise have applied to the distribution amount. An individual is limited to rolling over only one IRA distribution during a one-year (i.e., 12-month) period. The “one per-year” rollover rule takes all IRAs (traditional, Roth, SEP, and SIMPLE) owned by an individual into consideration when determining eligibility. In other words, a distribution from any IRA that is later rolled over disallows any other IRA distributions taken within a “one-year period” from being rolled over. The rollover process is reportable to both the IRS and the IRA owner. This includes the distribution and the amount of the rollover contribution.

Keep in mind that the above information only addresses moving assets between IRAs of the same type. Subscribers to the Wolters Kluwer IRA Library (including the IRA e-book) or on-demand IRA training can learn more about recharacterizing IRA regular contributions (i.e., traditional IRA to Roth IRA or Roth IRA to traditional IRA), converting traditional or SIMPLE IRA assets to a Roth IRA, and moving assets between employer plans and IRAs by referencing those materials.

Though not a rule-related topic, the final item that an IRA custodian/trustee should include in its top five list of things to be aware of is proper staff training. It is not uncommon for an IRA custodian/trustee to administer an IRA that has a substantial balance, which in many cases could be an individual’s single largest asset. Customers or members of your credit union will expect that their IRA is compliant with current rules. If an IRA custodian/trustee violates the rules, there is the potential for a penalty. Examples include, but are not limited to, when an individual is not provided an establishment document with the most current IRS Form 5305 series document or plain-language disclosure.

Another example is when IRA transactions are not reported appropriately to the IRS and IRA owner, hence the importance of understanding the concept of a beneficiary IRA and how to create one in your data system after an IRA owner's death. Additionally, understanding the differences between transfers, rollovers, conversions, and recharacterizations between IRAs, and rollovers and direct rollovers between employer plans and IRAs can help your IRA program run smoothly. A relatively small investment in training can potentially save a lot of time correcting mistakes.