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Puerto Rico order’s ‘gray areas’ delay IRA, retirement plan emergency withdrawals

By on November 29, 2017

SAN JUAN – The majority of the financial institutions in Puerto Rico have not been able to carry out an executive order issued by Gov. Ricardo Rosselló Nevares that allows qualified retirement plan holders to use up to $100,000 to meet their needs amid the emergency situation caused by Hurricane María.

The reason, bank representatives consulted by Caribbean Businesses said, is that the instructions issued by the Puerto Rico Treasury Department two weeks ago to carry out the transactions were not precise, leaving doubts that, if not clarified, could affect customers when filing their tax returns next year.

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“Last Friday, representatives of several institutions met at the Bankers Association because there are gray areas in how we are going to make the clients’ withholdings. The instructions [issued by Treasury] were not clear and neither are the forms we are supposed to use,” said Juan José Santiago, senior vice president and trust officer at Oriental Bank.

Santiago explained that one of the areas that should be defined this week is whether the order applies to Roth IRAs (individual retirement accounts), since in the past clients have been recommended to transfer their funds from a traditional IRAs to Roth IRAs for better tax breaks. With a traditional IRA, the tax benefit is received when a participant makes a deposit, while with a Roth IRA it is seen when drawing from the account.

In the case of private retirement plans, Santiago indicated that the order allows employers to decide whether to allow cash withdrawals and how.

“We are seeing that each employer is [different]. Some allow only $10,000 to be withdrawn [which is the minimum that can be withdrawn tax-free]; others will only allow withdrawing from the portion that the employee contributed not what was contributed by the company,” he said.

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Francisco Parés, the assistant secretary for internal revenue and tax policy at the Treasury Department, explained that Roth IRAs apply for the benefit, but not education savings accounts. Regarding the executive order, Parés said it was discussed and its draft was circulated among members of the banking industry and that it includes the recommendations made.

“At the moment, we don’t have any official questionings of any of the provisions of the order from members of the banking sector,” said the official, who assured that although there may be some doubt in exceptional cases, “for 99% of the cases, the provisions are clear.”

“It’s reasonable that the banks have not had time to train all their staff to handle these cases, but to say it’s the department’s fault, we differ. The policy has been made as flexible as possible to facilitate the process at the banks,” Parés said, while indicating that the burden of proof falls on taxpayers, who in turn have extensive provisions to claim their distribution.

Administrative Determination 17-29 was issued Nov. 15 and establishes the rules to be followed by financial institutions to comply with the governor’s executive order, which allows for up to $100,000 to be withdrawn in cash from IRAs and qualified private retirement plans at preferential tax rates .

The intention of the order, which extends until June 30, is to address the liquidity problems that thousands of families in Puerto Rico affected by Hurricane María face due to the extraordinary expenses the emergency has entailed.

The order provides that IRA or qualified private retirement plan holders can make aggregate cash withdrawals of up to $10,000 tax-free or of up to $100,000 at a preferential 10% rate, if the deduction is made at the time of distribution.

The benefit is exclusively for Puerto Rico residents, and applicants must present an affidavit certifying they reside and plan to remain on the island in 2018, as well as that the money will be used for emergency related expenses.

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Santiago stressed that he hopes any doubt is clarified this week so those interested can use the provision as soon as possible.

In a written statement, Vivien Montañez, first vice president of Individual Banking at Banco Popular, indicated that the bank was working on the programming required to update systems to comply with Treasury’s regulations.

“During the past few days, all the internal operational requirements and processes have been reviewed to be able to comply with the administrative determination for the withdrawal of IRA funds on account of extreme financial emergencies,” the document reads.

“At Popular, we have a genuine commitment to serve our customers with excellence and promptness. We have had talks with Treasury to clarify specific points and be able to comply with the determination to guide and process our customer requests quickly,” she added.

Montañez also announced that Popular will be eliminating the penalty for canceling IRAs during the established period, which banks can determine at their discretion.

Deputy Secretary Parés said any questions or requests for a private administrative determination can be sent to

He also said his department will communicate with the Bankers Association “to make ourselves available if they need any additional guidance,” adding that what the “secretary and governor want is for people to have the liquidity they surely need for expenses that in one way or another this emergency entailed,” Parés said.

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