The dormancy and escheatment rules for IRAs vary by state, as they do for all financial assets subject to escheatment. This means, whatever state you live in may impact the terms of your IRA.
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.
Be aware that IRAs impacted by dormancy must be subject to required minimum distributions (RMDs) to be impacted.
- Typically, dormancy and escheatment rules for IRAs differ state by state.
- When a person's assets are inactive (often after death) over a specific period, the assets can be seized by the state.
- The dormancy period for some assets is typically three to five years, but the dormancy period for IRAs is generally longer.
- Financial institutions are required by law to report inactivity on an account holder's IRA if the required minimum distributions are not occurring on the account.
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 and claimed by the state, assuming the account owner cannot be contacted. Sometimes they have been abandoned because the account owner has died, sometimes because the owner has become ill. It is not common for IRAs to become dormant if wills and trusts are up to date and if account owners have attached beneficiaries to the IRA themselves.
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, which varies around the country.
Roth IRAs, however, are often not subject to escheatment, because they typically do not carry RMD requirements.
How the Escheatment of IRAs Works
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 or she must begin taking required minimum distributions.
The minimum distribution age was set at 72 by the SECURE Act, for 2020 and going forward. It remains 70½ for those who turned that age during 2019 or in a prior year.
If state law sets the dormancy period at three years, for example, an IRA can be escheated if the account owner reaches age 75 without taking any distributions or logging any activity with the financial institution, and the institution is unable to contact the owner at the address listed on the account.