INDIVIDUAL RETIREMENT ACCOUNTS |
IRA Custodians
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IRA CUSTODIANS
Individual retirement accounts are domestic trusts or custodial accounts created by a written instrument for the exclusive benefit of an individual or his beneficiaries. Trustees of these accounts must be banks, savings and loan associations, insurance companies, federally insured credit unions or others who can demonstrate to the IRS the ability to properly administer the trust or account under the law. The written IRA instrument must include limits on the trustee's authority to invest, commingle and distribute the funds.
Gifts for Establishing IRAs
Many individuals are attracted to financial institutions for the establishment of their IRAs by the institutions' offers of cash bonuses or other gifts. However, the receipt of premiums or free or reduced cost bank services may violate ERISA rules. Generally individuals may not receive reduced or no cost services if qualified plan assets are taken into account when pricing the services. The Labor Department has issued an exemption that allows custodians to give small gifts or free or reduced cost services without violating the ERISA rules.
Banks and other financial institutions can offer cash or other gifts for opening or making additional contributions to IRAs - provided the value of an incentive is no more than $10 on deposits up to $5,000 and $20 on deposits over $5,000. These premiums may be paid to the person for whose benefit the IRA is established or that person's family members.
Another exemption allows banks to provide services at reduced cost or no cost to individuals with beneficial interests in IRAs. The services must be offered by the bank in the ordinary course of business to customers who qualify but do not maintain an IRA. The service has to be something the bank can legally perform under federal or state rules. Third parties, such as check printers and other service providers, would be able to offer incidental products of a de minimis value as long as the products were directly related to banking services.
The Comptroller of the Currency has cautioned banks about paying `finder's fees" in connection with IRAs. In particular, the Comptroller pointed out that the ERISA standards completely prohibit the offering of payments in the nature of "finder's fees" to third parties or to an employer whose employees set up a payroll deduction IRA.
Registered broker-dealers may also provide services at reduced fees or no cost to IRA and Keogh plan customers, or use the balances in these account to determine eligibility for discounted prices. These services may include financial planning, direct deposit/debit and automatic fund transfer privileges, enhanced account statements, toll-free access to client service centers, check writing privileges, debit/credit cards, special newsletters. and reduced brokerage and asset management fees.
IRA Advertising
The Federal Reserve Board has developed a framework of IRA deposit advertising rules. Under these rules, advertisements for time deposits that pay more than one fixed interest rate should set forth, in equal type size, each rate of interest to be paid, together with the length of time each rate will be paid and the average effective annual yield for the entire term of the account. In addition, advertisements for deposits to be used in connection with IRAs should not refer to contributions to such accounts as being "tax-free" or "tax exempt" but should make it clear that contributions to, and earnings on, IRAs only result in a deferral of federal income taxes.
In addition, the Federal Reserve Board has proposed other requirements which must be met in all advertising:
interest rates must be stated in terms of the annual rate of simple interest,advertisements that display an effective annual yield based on compounding interest must state the annual rate of simple interest and the basis of compounding interest,no interest rate can be advertised that states a yield based on a period of more than one year in order to ensure that effective yields are not artificially inflated,if an advertised rate is payable only on a deposit that meets a specific time or amount requirement, such requirements must be stated clearly and conspicuously,advertisements for time deposits must state that interest penalties apply in the event of early withdrawal, andmember banks must inform customers at the time that an account is opened as to the method that will be used in computing and paying interest on the account, including any provisions for nonpayment of interest.