The Right Way to Establish an IRA

By Jennifer Bassett, QKA, CISP, CIP

Establishing an IRA is a fairly simple process, but it can be easy to overlook a step or two, which could cause the entire account to be out of compliance and no longer tax-deferred. Taking the following steps will help ensure that your organization is setting up each IRA the right way.

Ask Questions

Your financial organization is not responsible for determining whether a client is eligible to make an IRA contribution. But it’s a good idea to ask some questions before getting too far into the establishment process. This may prevent the client from making an excess contribution, which can happen if she does not meet the eligibility requirements or exceeds the applicable contribution limit for the year.

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 Using an IRA contribution form, such as Ascensus’ Traditional IRA Contribution Eligibility form, may help clients determine their eligibility before they establish an IRA. (For more information on IRA eligibility requirements, see Successful IRA Programs Depend on Knowing How Traditional and Roth IRAs Differ.)

Complete All Required Paperwork

This may seem like an obvious step, but it is key to keeping the IRA in compliance. Having incomplete IRA documents is a common compliance issue—one that causes major problems for everyone involved. To properly establish a Traditional or Roth IRA, your financial organization must provide the following three documents to the IRA owner.

  • Plan agreement (contract between your financial organization and IRA owner)

  • Disclosure statement (document that explains the IRA rules in nontechnical language)

  • Financial disclosure (part of disclosure statement that projects IRA’s potential growth)

Just as important, your organization must ensure that the proper documents are signed. An IRA is considered “established” once the IRA owner and the financial organization representative sign the IRA plan agreement (or application). Without a signed IRA plan agreement, an IRA does not exist.

 Upon establishing an IRA, your client is ready to fund the IRA. Your organization must provide any disclosures that may be required for the particular investments selected by the IRA owner. The Truth-in-Savings (T-I-S) Act imposes additional disclosure requirements on certain IRA investments. If an IRA owner selects an investment that is covered by T‑I‑S, your financial organization must provide the appropriate disclosures.

Gather Beneficiary Information

Although designating beneficiaries is not an IRS requirement, it is an important step in establishing an IRA—for both your organization and the IRA owner. If done properly, you should have no difficulty determining the correct recipient of the IRA assets if the IRA owner dies with a balance remaining in the account. To assure the validity of the beneficiary designation, the IRA owner should sign and date the document used to name beneficiaries (such as the IRA application or IRA beneficiary designation form).

The information on the IRA application or IRA beneficiary designation form should be clear and complete. The IRA owner should specify the name, address, birth date, and Social Security number of each beneficiary. The IRA owner may name an entity other than an individual as a beneficiary, such as a church, a trust, or an estate to inherit the IRA assets. The beneficiary designation should list as much information as possible—including the entity’s name, address, and federal tax identification number. 

If the IRA owner does not have the beneficiary’s birth date or Social Security number (or federal tax identification number), the designation is still valid. But, if possible, your organization should try to obtain this information. A Social Security or tax identification number will be needed to report a distribution.

 Unless the IRA owner wants all primary beneficiaries—if more than one—to inherit equal portions of the IRA, she should specify what percentage should go to each. In anticipation that a primary beneficiary may die before the IRA owner, she also may wish to name one or more contingent beneficiaries, who would inherit only if there are no surviving primary beneficiaries.

Meet Customer Identification Program Requirements

Your organization must include IRAs in its customer identification program (CIP). When a client opens a new IRA, your organization generally must

  • verify the client's identity (name, date of birth, address, and identification number);

  • create and maintain a record of the information obtained under the financial organization’s CIP procedures; and

  • provide adequate notice that the information being obtained is to verify the client's identity.

Retain All Paperwork

Your organization should keep all documents necessary to reconstruct any financial transaction. IRA documents may be retained in various forms (e.g., hard copies, imaging, or other types of electronic media storage that can be readily reproduced as hard copies). When an IRA is established, the financial organization should retain either an original or a copy of each of the following documents.

  • IRA plan agreements, disclosure statements, and financial disclosures (or an acknowledgment that the IRA owner received each document)

  • Eligibility forms

  • Contribution forms

  • Beneficiary designations (i.e., either on the IRA application or a separate beneficiary designation form)

  • CIP-related documents

Maintain a Successful IRA Department

Proper IRA establishment is essential to a successful IRA program. While it may not seem like a big deal to skip a step or two during set-up of an IRA, in the long run it could be detrimental. Taking the time to ensure that the right procedures are followed will save time and money—for both your organization and its clients.