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Retirement Accounts

Phase 1 - Customer Onboarding

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Overview

Retirement accounts are tax advantaged brokerage accounts offered exclusively to US taxpayers each carrying their own limitations and taxing qualifications:
- Traditional IRA
- Roth IRA

IRA Account Opening

  • No additional information is required by DriveWealth or the IRS to open an IRA versus a standard taxable cash account

IRAs and Disclosure/Acknowledgments

  • There are additional disclosures and acknowledgments unique to an IRA account and this is part of the DriveWealth Disclosure Page:

    • DriveWealth Non-Bank Custodian Approval Letter
    • IRA Plan Agreement/Financial Disclosure

Traditional IRA

  • Contributions to a traditional IRA are tax deductible on the federal and state level in the year of the contribution and taxable in the year of withdrawal (at the individual’s tax rate in the year of each withdrawal). The limit changes every year
  • At age 59½ customers may start withdrawing any amount of funds without penalty. However, there is no requirement to make withdrawals
  • Prior to age 59½, withdrawals may incur a 10% penalty by the IRS. However, there are some exceptions. Though the individual should check with his or her accountant, exceptions may include unreimbursed medical expenses, health insurance premiums while unemployed, higher education expenses, buying/building a first home, inheriting an IRA, fulfilling an IRS levy, being called to active duty, etc.
  • Required Minimum Distributions (RMDs) - starting at age 72 and in April of the year following 72, a customer must start taking withdrawals. Failure to take RMDs will result in a penalty by the IRS
  • Customers can continue to make contributions to their IRAs after age 72 as long as they earn work income

Roth IRA

  • Annual contributions are not tax deductible; however, assets can grow tax-free as withdrawals are not subject to Income tax. Since Roth IRA tax contributions are not tax deductible, the customer does not lose tax deductibility by also participating in another plan that has tax deductibility
  • No tax or penalty on withdrawals of contributions after age 59½. Withdrawals of earnings are also tax-free if the account has been open 5+ years
  • No required minimum distributions, as long as the customer is the original account owner
  • Withdrawals prior to age 59½, if the account has been open 5+ years, may not be subject to tax or 10% penalty depending on the reason for withdrawal
  • Withdrawals prior to age 59½, if the account has been open less than 5 years, will be subject to tax, but may not be subject to 10% penalty, depending on the reason for withdrawal
  • No age limit on contributions as long as the individual has earned work income

Money Movement

Contributions

While making contributions to a client’s IRA, DriveWealth's APIs will facilitate the following:

  • Current tax year contribution
  • Prior Tax Year Contribution

DriveWealth's APIs will not facilitate the following and a form must be submitted along with the contribution:

  • Direct Rollovers- Election Form (Direct Rollover Request) and last monthly statement
  • Inherited IRA Plans- Election form (Inherited IRA Account Application) is required to ensure the proper IRS code is applied to the transaction.
    • Spouse beneficiaries may rollover inherited retirement plan assets to their own IRAs or rollover the inherited retirement plan assets to inherited IRAs
  • Indirect Rollovers, Transfer, Recharacterization. The last monthly statement from the legacy broker must be physically submitted to DriveWealth as proof of a qualified rollover
    • An election form is required to ensure the proper IRS code is applied to the transaction

Disbursements

All disbursement requests are facilitated through DriveWealth APIs. The associated forms become available in late February for the relevant tax year

  • Federal Tax
    • Through the API, the Customer will be able to provide a federal tax withholding election. The Customer may elect either no withholding or to withhold an amount of 10% or greater.
    • DriveWealth will withhold the elected amount (deducted from the distribution amount) and remit payment to the IRS
    • DriveWealth, through our administrator Ascensus, will report the withholding amounts to the IRS and electronically to the Customer through Forms 1099R and 5420. Typically, the Forms become available in late February for the relevant tax year
    • For non-qualified disbursements, it is the Customer's responsibility to file and pay the correct taxes and penalties to the IRS.
  • State Tax
    • DriveWealth will not withhold state taxes or the IRS penalty.
    • DriveWealth, through our administrator Ascensus, will report zero State tax withholding and any premature withdrawal to the IRS and electronically to the Customer through Forms 1099R and 5420
    • It is the Customer's responsibility to file and pay the correct State taxes to the IRS

Required Minimum Distributions (RMDs)

Current IRS regulation requires IRA account owners to start withdrawing funds after age 72 - specifically beginning by April 1st of the year following the IRA owner’s 72nd birthday. Article IV of the DriveWealth IRA Plan Agreement provides the formula for determining the RMD amounts and lists the options an IRA owner has for taking these distributions

  • Annual Lump Sum – Supported by DriveWealth APIs. Customer is limited to one annual election and DriveWealth does not withhold federal or state taxes
  • All Other Withdrawals – Not supported by DriveWealth APIs. Election Form (Standard RMD Election Form) for RMD must come back to DriveWealth if the customer wants DriveWealth to withhold RMD in increments other than annual lump sums or to satisfy an RMD across multiple IRA permutations. DriveWealth will not withhold any taxes
  • Tax Forms
    • DriveWealth will distribute 1099R for RMDs.
  • RMD Notification Process
    • All IRA account owners will be mailed notices regarding their election requirements and all election forms must be signed and sent back to DriveWealth to properly handle the RMD disbursements.
      • Election Forms will be mailed every 3 months until the Customer has submitted a completed Form or the RMD distribution is taken
      • If an IRA account holder has a spouse that is greater than 10 years their junior, there is a joint life expectancy table. The IRA account holder making the RMD election must include the corresponding information on the RMD Election form they complete and return to DriveWealth .
      • An IRA owner who has two or more IRA plans may satisfy their RMD requirements by taking from one IRA the amount required to satisfy the RMD from another IRA (held away from DriveWealth ). The customer must notify DriveWealth of their intent to do so, otherwise, without noting this on the RMD Election Form
      • DriveWealth will calculate and distribute the RMD based on the IRA account custodied with DriveWealth.
      • If no form is returned by the IRA account holder, the standard RMD disbursement will be calculated by DriveWealth and distributed using the standard calculation of the IRS life expectancy table and the customer’s fair market value of the account when the RMD is calculated.

Updated 8 months ago