IRA Payments to Unclaimed Property Fund Are Subject to Federal Withholding and Reporting


The IRS has clarified that a trustee’s payment of an individual’s interest in a traditional individual retirement account (IRA) to a state unclaimed property fund, as required by state law, is subject to federal income tax withholding and IRA reporting requirements. A person will not be treated as failing to comply with these requirements for payments made before the earlier of January 1, 2019, or the date it becomes reasonably practicable for the person to comply with the requirements.

IRA Payments to Unclaimed Property Fund

In the scenario analyzed, the individual was a U.S. person with an interest in a traditional IRA, and had not elected out of 10-percent withholding on nonperiodic distributions from the IRA. Under state law, an IRA trustee was required to pay an individual’s interest in an IRA to the state’s unclaimed property fund, under which the property owner can make a claim for property. Accordingly, the trustee paid the value of the individual’s IRA interest to the unclaimed property fund.

Withholding on IRA Distributions

Code Sec. 3405 provides the federal income tax withholding rules for designated distributions from IRAs. A designated distribution does not include, among other things, the portion of a distribution or payment that it is reasonable to believe is not includible in gross income. Any distribution or payment from or under an IRA, other than a Roth IRA, is treated as includible in gross income.

Federal income tax must be withheld from two types of designated IRA distributions: periodic payments and nonperiodic distributions. A nonperiodic distribution is a designated distribution that is not an annuity or similar periodic payment. The payor of a nonperiodic distribution must withhold 10 percent of the distribution for federal income tax purposes, but an individual may elect not to have this withholding apply.

Here, the payment of the individual’s traditional IRA interest to the state unclaimed property fund, as required by state law, was treated as includible in gross income. Thus, the payment was a designated distribution for purposes of Code Sec. 3405. The payment also was a nonperiodic distribution, because it was not an annuity or similar periodic payment. Because the individual did not elect out of withholding, the trustee was required to withhold 10-percent on the payment to the unclaimed property fund.

IRA Reporting

If distributions from an IRA total $10 or more in a calendar year, Code Sec. 408(i) requires the IRA trustee to report on the distributions to the IRS and the individuals for whom the account is maintained. The trustee makes the report on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Here, the trustee must report the distribution from the IRA to the state unclaimed property fund on a Form 1099-R that identifies the individual as the recipient.