Now is the Perfect Time to Review Your Record Retention Procedures
by Agatha Schmidt, CISP, SDIP, CHSP
Summer is typically a slower part of the year for most financial organizations, so organizations often use this “downtime” to review their operational policies and procedures. During this time of the year, our consultants on the Ascensus 800 Consulting Lines receive frequent calls about IRA record retention—including “How long should our financial organization keep IRA documents?”
Unfortunately, it is not a straightforward answer and no one source contains all the IRA record retention requirements; multiple federal laws and agencies governing financial organizations have different requirements and offer various recommendations. Generally, however, financial organizations must retain account identification records, such as IRA opening documents, and documentation that is necessary to reconstruct a transaction (including contribution forms, withdrawal forms, investment-related documentation and account statements), for at least five years from the date the account is closed. Certain states may also have their own laws and requirements on record retention, which may be more strict than federal requirements. Conservatively, financial organizations may want to keep records for seven or more years after the last activity has occurred. Financial organizations should ultimately consult with their legal counsel to determine the length of time to retain IRA account documentation.
The IRS requires financial organizations to keep records of IRA opening documents, such as the plan agreement, disclosure statement, and the financial disclosure—or at the very least, the IRA owner’s written acknowledgment that she received these documents. Failure to prove to the IRS—if required—that these documents were provided to the IRA owner upon account establishment can result in a $50 penalty per document. Additionally, the IRS specifically requires information returns, such as Forms 1099-R and Forms 5498, to be kept on file for at least three years from the reporting due date. Keeping copies of these returns may help reconstruct IRA transactions upon a client’s request, so it might make sense to keep these records for as long as all other IRA records are kept.
Our clients also frequently ask if there are requirements for financial organizations to retain the original hard copies of account records. Guidance on how financial organizations may maintain electronic records are provided in Revenue Procedures 97-22 and 98-25, as well as the E-SIGN Act of 2000. State statutes and regulations may also have certain requirements, therefore financial organizations that use an electronic platform for storing records should seek advice from their legal counsel to determine whether original hard copy documents must be retained along with the electronic records.
Failure to properly retain records may result in the IRS assessing civil and criminal penalties. The penalty amount depends on whether the failure was due to negligence or was due to a willful act. Individuals willfully violating recordkeeping requirements may be subject to criminal prosecution, and if convicted, may not only be subject to fines, but also imprisonment. In addition, it’s just good customer service to be able to provide transactional information that a client may request.
