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October 1, 2014

IRS Says LOA and Verbal Instructions OK for IRA and CESA Contributions

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by Denise Appleby

The IRS issued private letter ruling (PLR) 201437023, allowing an IRA custodian to treat IRA contributions as received ‘timely’, if instructions are submitted via a letter of authorization (LOA) or verbally, by the deadline for making IRA contributions.

The party that requested the PLR is a custodian for IRAs and Coverdell Education Savings Accounts (CESA).

Background

Regular IRA and CESA contributions for a year must be made by the account owner’s tax filing due date, which is April 15 for calendar year tax filers. No extensions apply.

Contributions are considered ‘timely’ made if they are received by the IRA custodian by April 15. Contributions received after April 15, are considered timely receive if postmarked by April 15.

IRA and CESA contributions must be made in cash.

The Custodian’s LOA Procedure

The custodian’s procedures for accepting contributions to IRAs and CESAs include LOAs from the account owners or authorized representatives; or verbal instructions, authorizing the custodian to journal the funds from the client’s non-retirement account to the IRA or CESA. The requirements are as follows:

  • The LOA must be in written form from the client or an authorized representative; or a verbal request to the custodian which is summarized via a written document signed and dated by an authorized representative of the custodian
  • The amount of contribution must be stated
  • The account number from which the contribution should be made must be included
  • The tax year to which the contribution applies should be included. Otherwise, the custodian would apply the contribution to the year in which they receive the instructions

Once such instructions are received by the custodian, it becomes irrevocable.

The Custodian’s Request

The custodian asked the IRS to rule that such contributions are considered ‘timely’ made, providing the funds are available to be moved to the IRA or CESA, and the transaction is processed within a ‘reasonable’ timeframe.

The IRS’ Ruling

The IRS ruled that an individual is considered to have made an IRA or CESA contribution by the deadline, if such a contribution is made in accordance with the custodian’s procedures for LOA or verbal instructions,and the transaction is completed as soon as administratively practicable.

Our Comments

Allowing contributions to be made with an LOA has long been part of standard operating procedures for many IRA custodians. Verbal instructions are also accepted by many who are able to record telephone calls.

Custodians who use either of these methods should ensure that they maintain proper records of the transactions, including whether the client requested the contribution to be made for the previous year.

Note: While a PLR cannot be used or cited by others as precedent, it gives a good idea of the IRS’s position on the issue addressed. 

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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