Date of request authorizing contribution to IRA treated as contribution date, IRS concludes

 

The IRS has concluded, in a private letter ruling, that the date of an irrevocable letter of authorization (LOA) sent by an individual to a financial services company, instructing the company to transfer funds from a non-retirement account to an individual retirement account (IRA) or Coverdell education savings account (CESA), would be treated as the date of the contribution and would determine whether the contribution was made by the due date of the customer’s tax return. Even if the company had not yet transferred the funds, so long as the postmark on the letter of authorization (or the date when a verbal authorization was given to a bank representative) was before the return due date, the contribution would be treated as having been made on the last day of the tax year preceding the due date of the return.

A financial services company is a non-bank trustee and custodian of IRAs and CESAs. In order for an individual to make a contribution to an existing IRA or CESA from a non-retirement account held at the company, the individual (or an authorized representative) must submit an LOA in writing, or must make a verbal request to a company representative (which is summarized in a document signed and dated by the company). The LOA must indicate the amount of the cash contribution, the account from which the funds are being transferred, and the tax year for which the contribution is made.

The LOA is irrevocable on receipt. The individual must have sufficient funds in his or her account and must have previously established an IRA or CESA with the company. Although the company processes an LOA as soon as administratively practicable, in some cases the transfer is not processed until after April 15, even if it is received by April 15.

Generally, a contribution to an IRA must be made by the due date of the IRA owner’s tax return, without extensions, for the year that the contribution is claimed. The IRS previously ruled, in a 1985 private letter ruling, that the postmark date of a contribution would be treated as the contribution date.

The IRS concluded that an individual submitting an LOA to the company, under the conditions described, would be deemed to have made a cash contribution to an IRA or CESA on the last day of the preceding taxable year. The funds must be transferred as soon as administratively practicable, and the IRA or CESA must satisfy Code Sec. 408 or Code Sec. 530, respectively.

Source: IRS Letter Ruling 201437023.

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