The dormancy and escheatment rules for IRAs vary by state, as they do for all financial assets subject to escheatment. However, regardless of the state, the dormancy period for IRAs is slightly different than for other types of assets. It is especially important to be aware of the terms of your IRA and the specific escheatment laws that apply to your state of residence.
What Is Escheatment?
When a financial account becomes dormant, meaning there has been no activity for an extended period of time, financial institutions are required to report the inactivity to the state. Assets that have remained inactive for a certain number of years can be declared abandoned, assuming the account owner cannot be contacted, and claimed by the state. This process is called escheatment. The period of inactivity that must pass before the state can assume ownership is called the dormancy period, and it is typically between three and five years depending on state law.
Escheatment of IRAs
Because IRAs are meant to sit relatively inactive for long periods during the accumulation phase, which is typically the owner's working years during which the account accrues interest, they are not subject to escheatment in the same way as other assets. Rather than being vulnerable to a state claim after a few years of inactivity, the dormancy period for IRAs cannot begin until the account owner reaches the age at which he must begin taking required minimum distributions (RMD), usually 70.5.
If state law sets the dormancy period at three years, for example, an IRA can be escheated if the account owner reaches age 73.5 without taking any distributions or logging any activity with the financial institution, and the institution is unable to contact him at the address listed on his account.
Roth IRAs are often not subject to escheatment because they typically do not carry RMD requirements.