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Tutorial: How to Establish a Roth IRA. Policies and Procedures

The actual procedure that applies to establishing a Roth IRA is determined by the financial institution with which the Roth IRA is established. Many financial institutions allow clients to open IRAs online, including providing any required signature and acknowledgements. Some require the client to print the required forms or obtain hard copies, and deliver them to the financial institution via mail or fax. Others require the client to open the IRA in one of their offices, face to face with a representative. Regardless of the method used, certain fundamental requirements must be met.

In general, the steps for opening or establishing a Roth IRA are:
  • Find a financial institution that is approved by the IRS to serve as a custodian or trustee for IRAs
  • Complete their requirement paperwork
  • Sign the necessary paperwork and acknowledge receipt of the required disclosures. The Roth IRA is not considered ‘established’, until the Roth IRA owner signs the IRA agreement (plan agreement).
Once these steps have been completed, the Roth IRA can be funded.
Roth IRS Can Only BE Opened With Approved Financial Institutions
A Roth IRA must be established with a financial institution that is approved to be the custodian or trustee of IRAs.   Generally, banks and credit unions meet this requirement. Brokerage firms and mutual fund companies generally need to submit an application to the IRS, and can only serve as custodian if they receive approval from the IRS[1]. An individual should not establish a Roth IRA with a financial institution or any other entity, unless the financial institution is approved to serve as an IRA custodian or trustee.
Required Documentation
When Roth IRA is being established, certain documentation must be provided to the Roth IRA owner by the financial institution which will act as trustee or custodian. In addition, the Roth IRA owner must provide written acknowledgements that the documentation was provided. These documents include the following:

(1)   Disclosure statement:  The disclosure statement is a two part document, which must be provided to the Roth IRA owner before the Roth IRA is established[2]. The parts of the disclosure statement include:

                      I.        An explanation of the rules that governs the Roth IRA.  These rules include:
o   The statutory requirements of the Roth IRA such as the contribution limits and the consequences of making contributions in excess of the statutory limits
o   The Distribution rules, including the tax treatment of Distributions and the Required Minimum Distribution (RMD) rules
o   How the owner may revoke the Roth IRA if he/she wishes
o   Transactions which could result in penalties. These include using the Roth IRA as collateral for a loan or involving the Roth IRA in prohibited transaction which could ultimately affect its Tax Exempt status
o   The Portability Rules which apply to the Roth IRA
                    II.        A financial disclosure, which is an explanation of the performance of the investments in the Roth IRA, including where an amount is guaranteed over a period of time or a projection of growth in value of the IRA can reasonably be made. The financial disclosure must show the amount guaranteed or projected to be made available to the benefited individual if:
o   Level annual contributions in the amount of $1,000 were made on the first day of each year, and
o   the Roth IRA owner were to withdraw the entire amount of the Roth IRA at the end of each of the first five years during which contributions are to be made; at the end of the year in which the benefited individual attains the ages of 60, 65, and 70; and at the end of each year during which the increase in the guaranteed available amount is less than the increase in the guaranteed amount available during any preceding year.
o   Similar information must be provided with respect to amounts guaranteed or projected to be made available under a Roth IRA which is to receive only a rollover contribution except the amounts guaranteed or projected to be made available are based on only one $1,000 contribution made in the beginning of the year the rollover contribution occurred. [3]
o   The actual language to be included in the disclosure depends on the type of investment, where guaranteed, can be reasonably projected, or cannot be either of the foregoing
Deadline for Providing Disclosure Statement
The disclosure statement must be provided to the Roth IRA owner on the day the Roth IRA is established or earlier.

(2)   Plan Agreement: The plan agreement, or Roth IRA agreement can be a Roth IRA Custodial Agreement if the IRA is held with a brokerage firm or an IRA Trust Agreement if the Roth IRA is held with a Bank or Trust company. Click here for the IRS’ version of the Custodial IRA Agreement. The Roth IRA Agreement establishes the terms of the Roth IRA, including how much can be contributed to the account; the distribution, rollover and transfer rules that apply to the Roth IRA, the types of investments that can be held in the Roth IRA. The agreement should also include information to the effect that the Roth IRA is non-forfeitable, it cannot be invested in life insurance, contributions must be made in cash- except for rollovers of securities, and that the Roth IRA assets cannot be commingled with other assets.

The Roth IRA is ‘established’ when the Roth IRA owner signs the Roth IRA agreement.
Custodians and trustees may use the IRS Model Forms for their agreement, of use their own prototype agreements. Prototype agreements are subject to IRS Approval.

(3)   Beneficiary Designation Form: Most Roth IRA Agreements or Roth IRA Adoption Agreements include a built-in Beneficiary Designation Form. Whether incorporated or separate, the Beneficiary Designation Form must be completed by the Roth IRA owner. Failure to complete the Beneficiary Designation Form will result in the beneficiaries of the Roth IRA being determined by the default provisions of the Roth IRA agreement.

Deadline for Establishing a Roth IRA
Technically, there is no deadline by which a Roth IRA must be established. However, if the Roth IRA owner intends to complete a transaction that is subject to a deadline, the Roth IRA must be established by the deadline in order to receive the transaction. For instance, if the Roth IRA owner intends to make a regular Roth IRA contribution for last year, the contribution must be made by April 15 of this year. As such, the Roth IRA must be established by April 15 of this year.
Right to Revoke a Roth IRA
A Roth IRA owner has the right to revoke a Roth IRA within seven days. The seven day period begins when the Roth IRA owner receives the disclosure statement. However, if the disclosure statement is provided to the Roth IRA owner less than seven days before the Roth IRA is established, the seven day period begins when the Roth IRA is established[4].
The Roth IRA owner may revoke the Roth IRA by either mailing the instructions, delivering written instructions in person, or by providing the instructions orally. The financial institution can also require that the instructions be provided in both oral and written form. The procedures to which the particular Roth IRA is subject must be explained in the Roth IRA disclosure statement.
If the instructions are permitted to be delivered orally, the delivery must be made during the financial institution’s normal business hours.
If a written notice is required or permitted, the procedure must provide that the instructions are considered mailed on the date of the postmark (or if sent by certified or registered mail, the date of certification or registration) ,if it is deposited in the mail in the United States in an envelope or other appropriate wrapper, first class postage prepaid,  and properly addressed.
Entire Balance Must be Returned
When a Roth IRA owner revokes a Roth IRA, the entire balance must be returned to him. The financial institution determines whether any earnings are also included with the principal amount. Because of this requirement, some financial institutions will not permit investment of the assets until the seven day period has expired.

[1] Treas. Reg. 1.408-2(e).
[2] Treas. Reg. 1.408-6(d)(4)(ii)(A)(1)
[3] Revenue Ruling 86-78
[4] Treas. Reg. 1.408-6(d)(4)(ii)(A)(2).
                    I.            Tutorial: Roth IRA Contributions
                  II.            Tutorial: Excess Roth IRA Contributions
                III.            Tutorial: Roth IRA Conversions
               IV.            Tutorial: Roth IRA Reconversions
                 V.            Tutorial: Roth IRA Rollovers and Transfers