For those of you with clients who still use snail mail to make contributions to their individual retirement accounts or Coverdell Education Savings Accounts (CESAs), Private Letter Ruling 201437023 (released June 18, 2014), is instructive. In this PLR, the Internal Revenue Service ruled that a taxpayer who submits a letter of authorization (LOA) to make a contribution to an existing IRA or CESA is deemed to have made a contribution on the last day of the preceding taxable year, so long as the LOA is postmarked or transmitted within the time prescribed by law for filing the taxpayer’s tax return.
In this case, a financial services company served as the custodian and trustee of IRAs and CESAs. For individual clients to make contributions from non-retirement accounts held at the company to existing IRAs or CESAs held at the company, clients must submit LOAs. An LOA can be a written request from the client or his authorized representative or a verbal request by the client or his authorized representative. If it’s a verbal request, it must be made to a company representative and summarized in a written, dated document.
The LOA must indicate the amount of cash contributed to the IRA or CESA; the name of the non-retirement account from which the funds are to be transferred; and the tax year the contribution is designated for. The LOA is irrevocable on receipt, and the company is to process the LOA as soon as practicable and as long as the client has enough funds in his non-retirement account. The company then transfers funds from the non-retirement account to the IRA or CESA. In certain instances, due to processing issues, there may be a delay to complete the transfer until after April 15, even if the LOA is received by that date.
Under Internal Revenue Code Section 219(f)(3), a taxpayer is deemed to have made a contribution to an IRA on the last day of the preceding taxable year, if it’s made no later than the time prescribed by law for filing the return for such taxable year. IRC Section 530(b)(4) uses similar language as it applies to contributions to CESAs. Under IRC Section 7502(a)(1), the date of the U.S postmark stamp is deemed the date of payment.
Accordingly, under the relevant IRC sections, an individual who submits an LOA directing a company to transfer funds from a non-retirement account to an IRA or CESA, is deemed to have made a cash contribution to the IRA or CESA on the last day of the preceding taxable year, so long as the date of the U.S. postmark stamp (or if it’s a verbal request, the date on which the request is made to a company representative), isn’t later than the due date of the taxpayer’s return, and the funds are transferred as soon as administratively practicable.