Legal Alert: IRS Rules on Account-Opening Bonuses in IRAs and 529 Plans

The Internal Revenue Service (the Service) recently released PLR 201310043 (December 11, 2012), which addresses account - opening bonuses credited to an individual retirement account (IRA) or section 529 college tuition savings plan. A financial services firm – which offered and credited the bonuses to the accounts of new customers meeting specified requirements – inquired whether it had a tax reporting obligation with respect to the bonuses.

- The Service’s limited prior guidance regarding this common industry practice includes a pair of 1987 private letter rulings (PLR 8722068 (March 3, 1987) and PLR 8732004 (April 27, 2007)), Rev. Proc. 2000 - 30 , IRS Publication 17 and IRS Publication 550.

- For IRAs, the Service conceptualized the bonus as interest or other earnings (e.g., a dividend) paid on the IRA, and ruled that the firm had no reporting obligation either under Internal Revenue Code § 6041 pursuant to a statutory exception for such payments ( § 6049(b)(2),(4) ) or “any other information reporting requirements of the Code.” Although not explicitly addressed, the implication of this ruling is that the bonus (i) is not taxable to the IRA owner until distributed and (ii) does not count against the IRA annual contribution limit.

Please see full alert below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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