Escheatment: When to Send IRA Assets to the State
By Debbie Shipman, CIP, CISP, CHSP
We have an IRA owner that we cannot locate and have not communicated with in years. Is there a mechanism by which we can get his IRA off our books?
The very nature of IRAs can make them more susceptible to becoming dormant. For example, because IRAs are meant to provide income during retirement, some individuals may keep their IRAs open for years with little to no activity. Other individuals may forget that they have an IRA or may not know that they have one (e.g., IRA beneficiaries or missing plan participants).
Escheat laws give each state rights to unclaimed or abandoned property. Because escheat laws are governed at the state level, each state has its own timeline; three, five, and seven years are common escheat periods, and some states do not begin the escheat period until the account owner’s required beginning date (RBD). Check with your financial organization’s legal counsel for specific escheatment procedures.
What do we need to do before we can escheat the IRA to the state?
Once the financial organization has verified its state escheat timeline has been met, it must attempt to locate the IRA owner or beneficiary at his last known address. If the financial organization cannot locate the IRA owner or beneficiary, then it must file a report with the state, pay unclaimed assets to the state, and report the escheated distributions as if they had been paid to the IRA owner or beneficiary.
How do we report IRA assets that have been escheated to the state?
IRS Revenue Ruling (Rev. Rul.) 2018-17 explains that financial organizations must report the escheated distribution on the applicable year’s Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contract, etc., identifying the IRA owner as the recipient. Rev. Rul. 2018-17 also states that escheated distributions are subject to income tax and the federal IRA withholding rules. The revenue ruling doesn’t indicate how the withholding notice requirement should be met. Informal IRS guidance suggests that financial organization may provide the withholding notice to the state; however, based on Rev. Rul. 2018-17, the state may not waive withholding on the IRA owner’s behalf.
Do the same reporting rules apply to inherited IRA assets?
Rev. Rul. 2018-17 doesn’t address inherited IRA assets. Conservatively, financial organizations should report those escheated distributions on Form 1099-R as a death distribution: code 4 for Traditional IRAs; or codes Q or T for Roth IRAs. The reporting should be completed in the beneficiary’s name and Social Security number (SSN). If the financial organization doesn’t have the beneficiary’s SSN, leave the “Recipient’s identification number” box blank.
