IRS Rules on Payment from an IRA to a State Unclaimed Property Fund
The IRS has clarified that federal income tax withholding under Code Section 3405 and Form 1099-R reporting under Section 408 generally apply for the year a payment is made, as required by state law, from an IRA to a state unclaimed property fund.
The IRS issued Revenue Ruling (Rev. Rul.) 2018-17
on May 29 in response to a scenario in which an individual has an interest in a traditional trusteed IRA and has not made a withholding election regarding her interest in the IRA. The law of the state where the individual is located requires the IRA trustee to pay her interest in the IRA to the state’s unclaimed property fund under which a claim for property may be made by the owner. In 2018, the trustee pays the individual’s interest in the IRA, which has a value of $1,000, to the state unclaimed property fund.
The questions the ruling addresses are whether, under the facts presented, the payment by the trustee of the individual’s interest in the IRA to the state’s unclaimed property fund is subject to federal income tax withholding under Section 3405 and also subject to reporting under Section 408(i).
The IRS says that the payment of the individual's interest in the IRA to the state’s unclaimed property fund is a payment from an IRA that is treated as includible in gross income. Furthermore, because the individual has not made a withholding election regarding the payment, a 10% withholding rate applies to the payment, so the trustee must withhold federal income tax of $100 (10% of the individual's $1,000 interest in the IRA). In addition, the trustee must report the $1,000 distribution from the IRA on a 2018 Form 1099-R identifying the individual as the recipient.
The IRS also says that a person will not be treated as failing to comply with the withholding and reporting requirements described in this revenue ruling regarding payments made before the earlier of Jan. 1, 2019, or the date it becomes reasonably practicable for the person to comply with those requirements.
Rev. Rul. 2018-17 will be contained in Internal Revenue Bulletin 2018-25, which will be published on June 18, 2018.