What is Escheatment and How Does it Affect Your Retirement Accounts?
By Beverly DeVeny, Chief IRA Analyst
Follow Us on Twitter: @theslottreport
Escheat: The power of a state to acquire title to property for which there is no owner.
How is it determined that an IRA has no owner? This will depend on both state law and the procedures in place at the institution holding your IRA or employer plan assets. Some typical hints could be mail that is returned marked undeliverable or accounts where there are no transactions.
If you have an IRA or an old employer plan where you are no longer making contributions, then there are no transactions taking place within the account. This could leave the account open to escheatment.
How can you tell if your retirement account has been escheated? You should be getting statements for each of your retirement accounts. For IRA accounts, you should also be receiving a Form 5498 each year that tells both you and IRS your year-end IRA account balance. The form is informational only and is required to be issued by May 31 each year. If you are not receiving statements or Form 5498, your account may have been escheated.
There is a process for the escheatment of funds. The process generally includes some method for finding the owner of “unclaimed” assets. There is also a waiting period before assets revert to the state. Most states have a five-year waiting period, but some states are now using a shorter period to help make up their funding shortfalls.
Many times what is escheated is cash from unclaimed refunds, insurance policies, or bank accounts. There is usually no tax consequence for these transactions. But retirement accounts are different. When they are escheated, they are generally cashed out. The state does not want to hold your investments and retain them in a retirement account for you. They want cash to pay their bills. This creates a taxable distribution to the owner of that account. If the owner does not receive a 1099-R for the distribution, then they do not know about the escheatment and don't include the distributed amount on their tax return.
When your retirement funds are escheated are they gone forever? Generally, no. The states have procedures for you to reclaim your funds. When you get your retirement funds back, you will have two choices. Keep them as non-retirement funds because you have already paid the tax on them or are in the process of doing so, or return them to an IRA account.
Returning your escheated assets to a retirement account may not be as easy as putting them in an IRA. Usually you are replacing the IRA assets a year or more after they were escheated. You will most likely have to go to IRS for a private letter ruling to get their approval to complete a rollover. This is a costly and time consuming process. The IRS fee for this ruling is $10,000 and you will have to pay a fee to someone to prepare the ruling request for you. Then there is a waiting period while IRS reviews your request and makes a decision.
Bottom line, avoid escheatment. Check up on your retirement accounts regularly. Make sure you are receiving statements. It is generally a good idea to consolidate old accounts to make this process easier to manage. And watch out for inactivity. You may need to make a contribution or take a distribution, even if it is a very small one, to keep the account “active.”
Content Citation Guidelines
Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.
Please be advised that prior to distributing re-branded content, you must send a proof to email@example.com for approval.
For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.
For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.
Please contact Matt Smith at firstname.lastname@example.org or (516) 536-8282 with any questions.