§ 408. Individual retirement accounts
(a)
Individual retirement account
For purposes of this section, the term “individual retirement account” means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements:
(1)
Except in the case of a rollover contribution described in subsection (d)(3) in [1] section
402
(c),
403
(a)(4),
403
(b)(8), or
457
(e)(16), no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year on behalf of any individual in excess of the amount in effect for such taxable year under section
219
(b)(1)(A).
(2)
The trustee is a bank (as defined in subsection (n)) or such other person who demonstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section.
(b)
Individual retirement annuity
For purposes of this section, the term “individual retirement annuity” means an annuity contract, or an endowment contract (as determined under regulations prescribed by the Secretary), issued by an insurance company which meets the following requirements:
(2)
Under the contract—
(3)
Under regulations prescribed by the Secretary, rules similar to the rules of section
401
(a)(9) and the incidental death benefit requirements of section
401
(a) shall apply to the distribution of the entire interest of the owner.
Such term does not include such an annuity contract for any taxable year of the owner in which it is disqualified on the application of subsection (e) or for any subsequent taxable year. For purposes of this subsection, no contract shall be treated as an endowment contract if it matures later than the taxable year in which the individual in whose name such contract is purchased attains age 701/2; if it is not for the exclusive benefit of the individual in whose name it is purchased or his beneficiaries; or if the aggregate annual premiums under all such contracts purchased in the name of such individual for any taxable year exceed the dollar amount in effect under section
219
(b)(1)(A).
(c)
Accounts established by employers and certain associations of employees
A trust created or organized in the United States by an employer for the exclusive benefit of his employees or their beneficiaries, or by an association of employees (which may include employees within the meaning of section
401
(c)(1)) for the exclusive benefit of its members or their beneficiaries, shall be treated as an individual retirement account (described in subsection (a)), but only if the written governing instrument creating the trust meets the following requirements:
(2)
There is a separate accounting for the interest of each employee or member (or spouse of an employee or member).
The assets of the trust may be held in a common fund for the account of all individuals who have an interest in the trust.
(d)
Tax treatment of distributions
(1)
In general
Except as otherwise provided in this subsection, any amount paid or distributed out of an individual retirement plan shall be included in gross income by the payee or distributee, as the case may be, in the manner provided under section
72.
(2)
Special rules for applying section
72
For purposes of applying section
72 to any amount described in paragraph (1)—
(C)
the value of the contract, income on the contract, and investment in the contract shall be computed as of the close of the calendar year in which the taxable year begins.
For purposes of subparagraph (C), the value of the contract shall be increased by the amount of any distributions during the calendar year.
(3)
Rollover contribution
An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B).
(A)
In general
Paragraph (1) does not apply to any amount paid or distributed out of an individual retirement account or individual retirement annuity to the individual for whose benefit the account or annuity is maintained if—
(i)
the entire amount received (including money and any other property) is paid into an individual retirement account or individual retirement annuity (other than an endowment contract) for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution; or
(ii)
the entire amount received (including money and any other property) is paid into an eligible retirement plan for the benefit of such individual not later than the 60th day after the date on which the payment or distribution is received, except that the maximum amount which may be paid into such plan may not exceed the portion of the amount received which is includible in gross income (determined without regard to this paragraph).
(B)
Limitation
This paragraph does not apply to any amount described in subparagraph (A)(i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 1-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account or an individual retirement annuity which was not includible in his gross income because of the application of this paragraph.
(C)
Denial of rollover treatment for inherited accounts, etc.
(i)
In general
In the case of an inherited individual retirement account or individual retirement annuity—
(ii)
Inherited individual retirement account or annuity
An individual retirement account or individual retirement annuity shall be treated as inherited if—
(D)
Partial rollovers permitted
(i)
In general
If any amount paid or distributed out of an individual retirement account or individual retirement annuity would meet the requirements of subparagraph (A) but for the fact that the entire amount was not paid into an eligible plan as required by clause (i) or (ii) of subparagraph (A), such amount shall be treated as meeting the requirements of subparagraph (A) to the extent it is paid into an eligible plan referred to in such clause not later than the 60th day referred to in such clause.
(E)
Denial of rollover treatment for required distributions
This paragraph shall not apply to any amount to the extent such amount is required to be distributed under subsection (a)(6) or (b)(3).
(H)
Application of section
72
(i)
In general
If—
(II)
a rollover contribution is made to an eligible retirement plan described in section
402
(c)(8)(B)(iii), (iv), (v), or (vi) with respect to all or part of such distribution,
then, notwithstanding paragraph (2), the rules of clause (ii) shall apply for purposes of applying section
72.
(ii)
Applicable rules
In the case of a distribution described in clause (i)—
(II)
notwithstanding the pro rata allocation of income on, and investment in, the contract to distributions under section
72, the portion of such distribution rolled over to an eligible retirement plan described in clause (i) shall be treated as from income on the contract (to the extent of the aggregate income on the contract from all individual retirement plans of the distributee), and
(III)
appropriate adjustments shall be made in applying section
72 to other distributions in such taxable year and subsequent taxable years.
(I)
Waiver of 60-day requirement
The Secretary may waive the 60-day requirement under subparagraphs (A) and (D) where the failure to waive such requirement would be against equity or good conscience, including casualty, disaster, or other events beyond the reasonable control of the individual subject to such requirement.
(4)
Contributions returned before due date of return
Paragraph (1) does not apply to the distribution of any contribution paid during a taxable year to an individual retirement account or for an individual retirement annuity if—
(A)
such distribution is received on or before the day prescribed by law (including extensions of time) for filing such individual’s return for such taxable year,
In the case of such a distribution, for purposes of section
61, any net income described in subparagraph (C) shall be deemed to have been earned and receivable in the taxable year in which such contribution is made.
(5)
Distributions of excess contributions after due date for taxable year and certain excess rollover contributions
(A)
In general
In the case of any individual, if the aggregate contributions (other than rollover contributions) paid for any taxable year to an individual retirement account or for an individual retirement annuity do not exceed the dollar amount in effect under section
219
(b)(1)(A), paragraph (1) shall not apply to the distribution of any such contribution to the extent that such contribution exceeds the amount allowable as a deduction under section
219 for the taxable year for which the contribution was paid—
(ii)
but only to the extent that no deduction has been allowed under section
219 with respect to such excess contribution.
If employer contributions on behalf of the individual are paid for the taxable year to a simplified employee pension, the dollar limitation of the preceding sentence shall be increased by the lesser of the amount of such contributions or the dollar limitation in effect under section
415
(c)(1)(A) for such taxable year.
(B)
Excess rollover contributions attributable to erroneous information
If—
(i)
the taxpayer reasonably relies on information supplied pursuant to subtitle F for determining the amount of a rollover contribution, but
(6)
Transfer of account incident to divorce
The transfer of an individual’s interest in an individual retirement account or an individual retirement annuity to his spouse or former spouse under a divorce or separation instrument described in subparagraph (A) of section
71
(b)(2) is not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest at the time of the transfer is to be treated as an individual retirement account of such spouse, and not of such individual. Thereafter such account or annuity for purposes of this subtitle is to be treated as maintained for the benefit of such spouse.
(7)
Special rules for simplified employee pensions or simple retirement accounts
(A)
Transfer or rollover of contributions prohibited until deferral test met
Notwithstanding any other provision of this subsection or section
72
(t), paragraph (1) and section
72
(t)(1) shall apply to the transfer or distribution from a simplified employee pension of any contribution under a salary reduction arrangement described in subsection (k)(6) (or any income allocable thereto) before a determination as to whether the requirements of subsection (k)(6)(A)(iii) are met with respect to such contribution.
(8)
Distributions for charitable purposes
(A)
In general
So much of the aggregate amount of qualified charitable distributions with respect to a taxpayer made during any taxable year which does not exceed $100,000 shall not be includible in gross income of such taxpayer for such taxable year.
(B)
Qualified charitable distribution
For purposes of this paragraph, the term “qualified charitable distribution” means any distribution from an individual retirement plan (other than a plan described in subsection (k) or (p))—
(i)
which is made directly by the trustee to an organization described in section
170
(b)(1)(A) (other than any organization described in section
509
(a)(3) or any fund or account described in section
4966
(d)(2)), and
(ii)
which is made on or after the date that the individual for whose benefit the plan is maintained has attained age 701/2.
A distribution shall be treated as a qualified charitable distribution only to the extent that the distribution would be includible in gross income without regard to subparagraph (A).
(C)
Contributions must be otherwise deductible
For purposes of this paragraph, a distribution to an organization described in subparagraph (B)(i) shall be treated as a qualified charitable distribution only if a deduction for the entire distribution would be allowable under section
170 (determined without regard to subsection (b) thereof and this paragraph).
(D)
Application of section
72
Notwithstanding section
72, in determining the extent to which a distribution is a qualified charitable distribution, the entire amount of the distribution shall be treated as includible in gross income without regard to subparagraph (A) to the extent that such amount does not exceed the aggregate amount which would have been so includible if all amounts in all individual retirement plans of the individual were distributed during such taxable year and all such plans were treated as 1 contract for purposes of determining under section
72 the aggregate amount which would have been so includible. Proper adjustments shall be made in applying section
72 to other distributions in such taxable year and subsequent taxable years.
(E)
Denial of deduction
Qualified charitable distributions which are not includible in gross income pursuant to subparagraph (A) shall not be taken into account in determining the deduction under section
170.
(9)
Distribution for health savings account funding
(A)
In general
In the case of an individual who is an eligible individual (as defined in section
223
(c)) and who elects the application of this paragraph for a taxable year, gross income of the individual for the taxable year does not include a qualified HSA funding distribution to the extent such distribution is otherwise includible in gross income.
(B)
Qualified HSA funding distribution
For purposes of this paragraph, the term “qualified HSA funding distribution” means a distribution from an individual retirement plan (other than a plan described in subsection (k) or (p)) of the employee to the extent that such distribution is contributed to the health savings account of the individual in a direct trustee-to-trustee transfer.
(C)
Limitations
(i)
Maximum dollar limitation
The amount excluded from gross income by subparagraph (A) shall not exceed the excess of—
(ii)
One-time transfer
(I)
In general
Except as provided in subclause (II), an individual may make an election under subparagraph (A) only for one qualified HSA funding distribution during the lifetime of the individual. Such an election, once made, shall be irrevocable.
(II)
Conversion from self-only to family coverage
If a qualified HSA funding distribution is made during a month in a taxable year during which an individual has self-only coverage under a high deductible health plan as of the first day of the month, the individual may elect to make an additional qualified HSA funding distribution during a subsequent month in such taxable year during which the individual has family coverage under a high deductible health plan as of the first day of the subsequent month.
(D)
Failure to maintain high deductible health plan coverage
(i)
In general
If, at any time during the testing period, the individual is not an eligible individual, then the aggregate amount of all contributions to the health savings account of the individual made under subparagraph (A)—
(E)
Application of section
72
Notwithstanding section
72, in determining the extent to which an amount is treated as otherwise includible in gross income for purposes of subparagraph (A), the aggregate amount distributed from an individual retirement plan shall be treated as includible in gross income to the extent that such amount does not exceed the aggregate amount which would have been so includible if all amounts from all individual retirement plans were distributed. Proper adjustments shall be made in applying section
72 to other distributions in such taxable year and subsequent taxable years.
(e)
Tax treatment of accounts and annuities
(1)
Exemption from tax
Any individual retirement account is exempt from taxation under this subtitle unless such account has ceased to be an individual retirement account by reason of paragraph (2) or (3). Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section
511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations).
(2)
Loss of exemption of account where employee engages in prohibited transaction
(A)
In general
If, during any taxable year of the individual for whose benefit any individual retirement account is established, that individual or his beneficiary engages in any transaction prohibited by section
4975 with respect to such account, such account ceases to be an individual retirement account as of the first day of such taxable year. For purposes of this paragraph—
(B)
Account treated as distributing all its assets
In any case in which any account ceases to be an individual retirement account by reason of subparagraph (A) as of the first day of any taxable year, paragraph (1) of subsection (d) applies as if there were a distribution on such first day in an amount equal to the fair market value (on such first day) of all assets in the account (on such first day).
(3)
Effect of borrowing on annuity contract
If during any taxable year the owner of an individual retirement annuity borrows any money under or by use of such contract, the contract ceases to be an individual retirement annuity as of the first day of such taxable year. Such owner shall include in gross income for such year an amount equal to the fair market value of such contract as of such first day.
(4)
Effect of pledging account as security
If, during any taxable year of the individual for whose benefit an individual retirement account is established, that individual uses the account or any portion thereof as security for a loan, the portion so used is treated as distributed to that individual.
(5)
Purchase of endowment contract by individual retirement account
If the assets of an individual retirement account or any part of such assets are used to purchase an endowment contract for the benefit of the individual for whose benefit the account is established—
(6)
Commingling individual retirement account amounts in certain common trust funds and common investment funds
Any common trust fund or common investment fund of individual retirement account assets which is exempt from taxation under this subtitle does not cease to be exempt on account of the participation or inclusion of assets of a trust exempt from taxation under section
501
(a) which is described in section
401
(a).
(g)
Community property laws
This section shall be applied without regard to any community property laws.
(h)
Custodial accounts
For purposes of this section, a custodial account shall be treated as a trust if the assets of such account are held by a bank (as defined in subsection (n)) or another person who demonstrates, to the satisfaction of the Secretary, that the manner in which he will administer the account will be consistent with the requirements of this section, and if the custodial account would, except for the fact that it is not a trust, constitute an individual retirement account described in subsection (a). For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof.
(i)
Reports
The trustee of an individual retirement account and the issuer of an endowment contract described in subsection (b) or an individual retirement annuity shall make such reports regarding such account, contract, or annuity to the Secretary and to the individuals for whom the account, contract, or annuity is, or is to be, maintained with respect to contributions (and the years to which they relate), distributions aggregating $10 or more in any calendar year, and such other matters as the Secretary may require. The reports required by this subsection—
(2)
shall be furnished to individuals—
(A)
not later than January 31 of the calendar year following the calendar year to which such reports relate, and
In the case of a simple retirement account under subsection (p), only one report under this subsection shall be required to be submitted each calendar year to the Secretary (at the time provided under paragraph (2)) but, in addition to the report under this subsection, there shall be furnished, within 31 days after each calendar year, to the individual on whose behalf the account is maintained a statement with respect to the account balance as of the close of, and the account activity during, such calendar year.
(k)
Simplified employee pension defined
(1)
In general
For purposes of this title, the term “simplified employee pension” means an individual retirement account or individual retirement annuity—
(2)
Participation requirements
This paragraph is satisfied with respect to a simplified employee pension for a year only if for such year the employer contributes to the simplified employee pension of each employee who—
(B)
has performed service for the employer during at least 3 of the immediately preceding 5 years, and
(C)
received at least $450 in compensation (within the meaning of section
414
(q)(4)) from the employer for the year.
For purposes of this paragraph, there shall be excluded from consideration employees described in subparagraph (A) or (C) of section
410
(b)(3). For purposes of any arrangement described in subsection (k)(6), any employee who is eligible to have employer contributions made on the employee’s behalf under such arrangement shall be treated as if such a contribution was made.
(3)
Contributions may not discriminate in favor of the highly compensated, etc.
(A)
In general
The requirements of this paragraph are met with respect to a simplified employee pension for a year if for such year the contributions made by the employer to simplified employee pensions for his employees do not discriminate in favor of any highly compensated employee (within the meaning of section
414
(q)).
(C)
Contributions must bear uniform relationship to total compensation
For purposes of subparagraph (A), and except as provided in subparagraph (D), employer contributions to simplified employee pensions (other than contributions under an arrangement described in paragraph (6)) shall be considered discriminatory unless contributions thereto bear a uniform relationship to the compensation (not in excess of the first $200,000) of each employee maintaining a simplified employee pension.
(4)
Withdrawals must be permitted
A simplified employee pension meets the requirements of this paragraph only if—
(5)
Contributions must be made under written allocation formula
The requirements of this paragraph are met with respect to a simplified employee pension only if employer contributions to such pension are determined under a definite written allocation formula which specifies—
(6)
Employee may elect salary reduction arrangement
(A)
Arrangements which qualify
(i)
In general
A simplified employee pension shall not fail to meet the requirements of this subsection for a year merely because, under the terms of the pension, an employee may elect to have the employer make payments—
(ii)
50 percent of eligible employees must elect
Clause (i) shall not apply to a simplified employee pension unless an election described in clause (i)(I) is made or is in effect with respect to not less than 50 percent of the employees of the employer eligible to participate.
(iii)
Requirements relating to deferral percentage
Clause (i) shall not apply to a simplified employee pension for any year unless the deferral percentage for such year of each highly compensated employee eligible to participate is not more than the product of—
(B)
Exception where more than 25 employees
This paragraph shall not apply with respect to any year in the case of a simplified employee pension maintained by an employer with more than 25 employees who were eligible to participate (or would have been required to be eligible to participate if a pension was maintained) at any time during the preceding year.
(C)
Distributions of excess contributions
(D)
Deferral percentage
For purposes of this paragraph, the deferral percentage for an employee for a year shall be the ratio of—
(E)
Exception for State and local and tax-exempt pensions
This paragraph shall not apply to a simplified employee pension maintained by—
(F)
Exception where pension does not meet requirements necessary to insure distribution of excess contributions
This paragraph shall not apply with respect to any year for which the simplified employee pension does not meet such requirements as the Secretary may prescribe as are necessary to insure that excess contributions are distributed in accordance with subparagraph (C), including—
(ii)
requirements which, notwithstanding paragraph (4), provide that contributions (and any income allocable thereto) may not be withdrawn from a simplified employee pension until a determination has been made that the requirements of subparagraph (A)(iii) have been met with respect to such contributions.