Non-Deductible/ROTH IRA Disclosure Statement

Transcription

1 UBS Trust Company of Puerto Rico Non-Deductible/ROTH IRA Disclosure Statement UBS Trust Company of Puerto Rico ( UBS Trust or the Trustee ), as trustee of the UBS Puerto Rico Non- Deductible/ ROTH Individual Retirement Account, must furnish each participant (each such participant, an Accountholder ) with a disclosure statement containing certain general legal and tax information pertaining to Puerto Rico non-deductible individual retirement accounts ( Non-Deductible IRA or Non-Deductible IRAs ) under the Puerto Rico Internal Revenue Code of 2011, as amended (the 2011 Code ). Accordingly, this IRA Disclosure Statement is provided to each Accountholder, in connection with his/her opening of a Non-Deductible IRA and the corresponding investment of his/her contribution in shares of common stock or units of certain open-end investment companies created pursuant to the Puerto Rico Investment Companies Act of 1954, as amended, which invest at least 20% of their respective assets in certain Puerto Rico securities (the Shares ). This document is not intended to be exhaustive, conclusive, or applicable to any particular person or situation, nor is it intended to be a substitute for legal and tax advice. Section of the 2011 Code allows individuals to elect to compute their income tax obligations for tax years 2011 through 2015 pursuant to the provisions of the Puerto Rico Internal Revenue Code of 1994, as amended (the 1994 Code ). Unless otherwise indicated, the matters disclosed herein will also apply to an Accountholder that elects to be taxed under the 1994 Code (sometimes referred to herein as an Electing Accountholder ). The 1994 Code and the 2011 Code are jointly hereafter referred to as the PR-IRC. The existing provisions of the statutes, regulations, judicial decisions, and administrative pronouncements on which the disclosure contained herein is based, are subject to change, even with retroactive effect. INVESTORS ARE URGED TO CONSULT THEIR LEGAL AND TAX ADVISORS PRIOR TO OPENING OR CONTRIBUTING TO A NON-DEDUCTIBLE IRA. NEITHER THE UBS NON-DEDUCTIBLE IRA NOR AN INVESTMENT IN THE SHARES IS INSURED OR GUARANTEED BY THE U.S. GOVERNMENT OR BY THE COMMONWEALTH OF PUERTO RICO. ACCOUNTHOLDERS SHOULD BE AWARE THAT NEITHER THE UBS NON- DEDUCTIBLE IRA NOR THE SHARES ARE AN OBLIGATION OF, OR GUARANTEED, BY UBS FINANCIAL SERVICES INCORPORATED OF PUERTO RICO, UBS TRUST, UBS AG, OR ANY OF THEIR AFFILIATES. IN ADDITION, SUCH INVESTMENTS ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE GOVERNMENTS OF THE UNITED STATES OR PUERTO RICO. You may close your UBS Non-Deductible IRA, without any penalties, within seven (7) business days following the opening of your UBS Non- Deductible IRA, by providing a written cancellation notification to UBS Trust at the address specified below. Such cancellation notification should be mailed to UBS Trust so that it is postmarked (or certified or registered, if sent by certified or registered mail) within such seven (7) day period. Upon receipt of such written notice by UBS Trust, all contributions made will be refunded without any reduction. Letters to UBS Trust should be mailed to American International Plaza - Tenth Floor, 250 Muñoz Rivera Avenue, San Juan, Puerto Rico 00918, Attention: IRA Department. The PR-IRC enables eligible individuals to make annual contributions to a Non-Deductible IRA (the Non- Deductible IRA Contributions ). The total amount of the permissible annual Non-Deductible IRA Contributions is not deductible by an Accountholder in computing his/her taxable income for Puerto Rico income tax purposes. Eligibility The only requirements for eligibility for the UBS Non- Deductible IRA are that you have your principal residence within the Commonwealth of Puerto Rico, and that you receive compensation, which includes, among other things, wages, salaries, professional fees, income from occupations, salesman s commissions, tips, or selfemployment income. However, compensation does not include interest, dividends, rents, royalties, or capital gains or other non-employment income. For married taxpayers filing a joint Puerto Rico income tax return, a Non- Deductible IRA may be opened for each spouse, even if only one of the spouses is employed or receives any compensation. In addition and solely with respect to Electing Accountholders, the 1994 Code provides that annual IRA Contributions made to a UBS Non-Deductible IRA by an Accountholder who has also made elective deferrals under certain Qualified Plans (as defined below) will reduce the maximum allowable annual contribution to such Qualified Plans. Electing Accountholders should

2 consult their tax advisors to determine the application of these rules when elective deferrals are made under Qualified Plans. Lastly, if the Accountholder is no longer a bona fide resident of Puerto Rico, the tax benefits of the UBS Non-Deductible IRA no longer apply. There is no age limit to contribute to a Non-Deductible IRA. Non-transferable and Non-forfeitable. You may not transfer ownership of your Non-Deductible IRA without disqualifying it from tax-favored treatment, except to your former spouse as a result of a divorce decree or under a written instrument arising from your divorce. You have a fully vested interest in your Non- Deductible IRA that is non-forfeitable. Contributions Regular Contributions. The aggregate permissible maximum annual contribution to one or more Non-Deductible IRA(s) is $5,000 (or such maximum annual contribution as may be allowed in any future taxable year), or an Accountholder s adjusted gross income received from salaries or earnings attributed to professions or occupations, whichever is less. A married taxpayer who files a joint Puerto Rico income tax return may contribute up to an additional $5,000 (or such maximum annual contribution as may be allowed in any future taxable year) to a separate IRA established by or for such Accountholder s spouse, even if said spouse derived no gross income from the above-mentioned sources, provided that their combined Non-Deductible IRA Contribution does not exceed the lesser of (i) $10,000 or (ii) their combined adjusted gross income received from salaries or earnings attributed to professions or occupations for the given year. Furthermore, the maximum annual amount that may be contributed to a Non-Deductible IRA for a taxable year will be reduced by the amount that the taxpayer has contributed to a regular deductible individual retirement account (a Regular IRA ) established under the PR-IRC for such taxable year, and contributions to any other Non-Deductible IRAs established under the PR-IRC. In such regard, you are encouraged to contact your tax and legal advisors. For these purposes, a contribution to a Non- Deductible IRA will be treated as made for the taxable year in which it is actually made or may be treated as made for the prior taxable year if it is made no later than the date prescribed by law for such Accountholder to file his/her Puerto Rico income tax return for that prior taxable year (including any applicable extension to the time for filing). Rollover Contributions from IRAs. An Accountholder may contribute to a Non-Deductible IRA amounts distributed from a Regular IRA established under the PR-IRC, provided the total amount distributed (such total amount adjusted as described herein) is contributed to a Non-Deductible IRA within 60 days of the distribution ( Qualifying IRA Rollover Contribution ). If the proposed contribution is not made on a timely basis or does not consist of the total amount distributed, the distribution may not be contributed to a Non-Deductible IRA. Such distribution will be subject to Puerto Rico income tax and the withholding of income tax at the source pursuant to Section (d) of the 2011 Code (or Section 1169(d) of the 1994 Code in the case of an Electing Accountholder) and may be subject to the premature distribution penalties provided by Section (g) of the 2011 Code (or Section 1169(g) of the 1994 Code in the case of an Electing Accountholder). For these purposes, the amount that is required to be contributed to a Non-Deductible IRA is the total amount distributed from the Regular IRA less the amount of tax withheld at the source, as further described herein. An amount distributed from a Regular IRA that is contributed to a Non-Deductible IRA as a Qualifying IRA Rollover Contribution will be subject to Puerto Rico income tax and the withholding of income tax at the source rules prescribed by Section (d) of the 2011 Code (or Section 1169(d) of the 1994 Code in the case of an Electing Accountholder) but will not be subject to the premature distribution penalties imposed by Section (g) of the 2011 Code (or Section 1169(g) of the 1994 Code in the case of an Electing Accountholder). Rollover Contributions from Non-Deductible IRAs. An Accountholder may contribute to a Non-Deductible IRA amounts distributed from other Non-Deductible IRAs established under the PR-IRC, provided such contribution is made within 60 days of the receipt of the distribution and consists of the total amount distributed (a Qualifying Non-Deductible IRA Rollover Contribution ). If the contribution is not made on a timely basis or does not consist of the total amount distributed, the distribution may not be contributed to a Non-Deductible IRA and will be subject to Puerto Rico income tax and applicable penalties provided in Section of the 2011 Code (or Section 1169B of the 1994 Code in the case of an Electing Accountholder) if such distribution does not otherwise qualify as a Qualifying Distribution, as defined herein. Rollover Contributions from Qualifying Plans. A lump sum distribution received within the taxable year by an Accountholder within such Accountholder s taxable year from a pension, profit-sharing, or stock bonus plan described in Section of the 2011 Code (or Section 1165 of the 1994 Code in the case of an Electing Accountholder) (the Qualified Plan ) on account of separation from service ( Lump-Sum Distribution ) may be contributed to a Non-Deductible IRA established by such Accountholder, provided the total amount distributed from the Qualified Plan (adjusted as described herein) is so contributed within 60 days of the receipt of the distribution ( Qualifying Plan Rollover Contribution ). If the contribution is not timely made, the distribution from the Qualified Plan may not be contributed to a Non- Deductible IRA. For these purposes, the amount that is required to be contributed to a Non-Deductible IRA is the total amount distributed from the Qualified Plan less the amount of tax withheld at the source, as further described herein. A distribution received by an Accountholder from a Qualified Plan that does not qualify as a Lump-Sum Distribution may not be contributed to a Non-Deductible IRA. An amount distributed from a Qualifying Plan that is contributed to a Non-Deductible IRA as a Qualifying 2

3 Plan Rollover Contribution will be subject to Puerto Rico income tax and the withholding of income tax at the source rules prescribed by Sections (b) (or Section 1165(b) of the 1994 Code in the case of an Electing Accountholder) and (d)(5) of the 2011 Code (or Section 1169B(d)(5) of the 1994 Code in the case of an Electing Accountholder). Excess Non-Deductible IRA Contributions If an Accountholder contributes an amount to a Non- Deductible IRA in excess of the maximum amount permissible and the excess is not reimbursed (along with the amount of net income attributable to such excess contribution) by no later than the deadline for the filing of such Accountholder s income tax return for the year with respect to which the excess Non-Deductible IRA Contributions were made (including any applicable extension of the time for filing), the entire balance of such Non-Deductible IRA will be deemed to have been distributed to such Accountholder as of the first day of the year with respect to which the excess Non-Deductible IRA Contributions were made. The amount of a Non- Deductible IRA treated as distributed will be subject to the Distribution rules described herein. Investments in Life Insurance Not Permitted Non-Deductible IRA Contributions may not be invested in life insurance policies. Distributions Qualifying Distributions. A Qualifying Distribution from a Non-Deductible IRA is not includable in the Accountholder s gross income and is exempt from Puerto Rico income tax. A distribution from a Non-Deductible IRA will constitute a Qualifying Distribution if it is made (i) on or after the Accountholder has attained the age of 60, (ii) on or after the death of the Accountholder to a beneficiary or the Accountholder s estate, (iii) on account of an Accountholder s disability (as defined in the PR-IRC), (iv) on account of an Accountholder s unemployment (as defined in the PR-IRC), (v) to cover the expenses of an Accountholder s direct dependents in connection with their university studies, (vi) for the purchase or construction of an Accountholder s first principal residence (subject to compliance with certain requirements of the PR-IRC), (vii) for the repair or reconstruction of an Accountholder s principal residence as a result of fire, hurricane, earthquake or other fortuitous cause, (viii) the need to prevent an imminent foreclosure of the principal residence or further delays in the payment of a mortgage loan secured by the principal residence, (ix) for the acquisition of a computer for a dependent of the Accountholder within the second degree of consanguinity that is a student at a university, up to an amount of $1,200 and only once every six (6) years, or (x) for the treatment of a severe, chronic, degenerative or terminal illness of the Accountholder or relative within the fourth degree of consanguinity or second degree of affinity. Non-Qualifying Distributions. A distribution from a Non- Deductible IRA that is not a Qualifying Distribution ( Non- Qualifying Distribution ) is subject to Puerto Rico income taxes as follows: (i) that part of the distribution that is attributable to income earned by a Non-Deductible IRA that is not entitled to reduced tax rates as described below, is subject to Puerto Rico regular income tax rates; (ii) that part of the distribution that is attributable to income from sources within Puerto Rico (as determined under the source of income rules of the PR-IRC), earned by a Non-Deductible IRA (excluding the interest described in item (iii) below) is subject to an optional Puerto Rico income tax of 17% to be withheld at the source by the Trustee, such option to be elected at the discretion of the Accountholder; (iii) subject to the requirements imposed by the PR-IRC, that part of the distribution that is attributable to interest earned by a Non-Deductible IRA from certain types of deposits with financial institutions is eligible for the Puerto Rico income tax exclusion available for qualifying interest, subject to an annual maximum exemption as provided by the PR-IRC, currently equal to $2,000 (or $4,000, in the case of a married taxpayer filing a joint tax return under the 2011 Code) (the Annual Exemption ); (iv) that part of the distribution that is attributable to interest as contemplated in item (iii) above, in excess of the maximum Annual Exemption, is subject to an optional Puerto Rico income tax withholding of 17%; and (v) subject to the requirements imposed by the PR- IRC, distributions from a Non-Deductible IRA of amounts that do not comprise contributions to a Non-Deductible IRA made to an individual enjoying the retirement benefits offered by the Puerto Rico Retirement System, Judiciary Retirement System, or the Teachers Retirement System will be subject to an optional Puerto Rico income tax rate of 10% to be withheld at the source by the Trustee. A partial distribution made by a Non-Deductible IRA will be treated as being made from the different items that comprise the balance of the account (including the Accountholder s basis therein) in accordance with the distribution allocation rules provided by the regulations of the PR-IRC. For these purposes, an Accountholder s basis in a Non-Deductible IRA will equal to the sum of the following: (a) the amount of the Non-Deductible IRA Contributions, (b) income derived by a Non-Deductible IRA that is exempt from Puerto Rico income tax, (c) the Qualifying IRA Rollover Contributions, (d) Qualifying Non- Deductible IRA Contributions, (e) Qualifying Plan Rollover Contributions, and (f) the amounts accumulated and undistributed in the UBS Non-Deductible IRA over which the Accountholder made prepayments of the 8% Puerto Rico income taxes. Alternate Basic Tax. Under the rules of the PR-IRC, an individual must determine his/her regular tax as well as an alternate basic tax and is required to pay the higher of these amounts. An individual must compute his/her alternate basic tax, by determining such individual s alternate basic taxable income. An individual s alternate basic taxable income will include certain items of income that are otherwise exempt from the regular tax or that are subject to preferential regular tax rates. In the specific case of a Non-Qualifying Distribution, an Accountholder s alternate basic taxable income will include the Annual Exemption (to the extent claimed for regular tax purposes) and distributions of any interest earned 3

4 by an IRA from certain types of deposits with financial institutions that were elected to be taxed at the 17% tax rate. Penalty on Non-Qualifying Distributions. The part of a Non-Qualifying Distribution from an Accountholder s Non-Deductible IRA that constitutes gross income under the 2011 Code is subject to a 10% penalty imposed by Section (g) of the 2011 Code (or Section 1169(g) of the 1994 Code in the case of an Electing Accountholder). The 10% penalty will be withheld from that part of a Non-Qualifying Distribution that is subject to Puerto Rico income tax. Distributions to make Qualifying Non-Deductible IRA Rollover Contributions. A distribution from a Non- Deductible IRA that is contributed to a Non-Deductible IRA as a Qualifying Non-Deductible IRA Rollover Contribution is not subject to Puerto Rico income tax. Death of an Accountholder. Upon an Accountholder s death, the entire balance of such Accountholder s Non- Deductible IRA must be distributed to such Accountholder s beneficiary or beneficiaries within a period of five (5) years of the death of such Accountholder. Notwithstanding this, if (i) an Accountholder elected to receive distributions from such Accountholder s IRA over a fixed term permitted by the PR-IRC and (ii) such distributions have commenced, the distributions will continue as scheduled. The same rule applies at the death of the surviving spouse of an Accountholder with respect to his/her beneficiaries if distributions to the surviving spouse have commenced. However, this rule does not apply to an Accountholder s beneficiary who elects to treat the undistributed balance of such Accountholder s IRA as an IRA owned by such beneficiary for purposes of determining the period from which such balance is to be distributed. Any distribution to an Accountholder s beneficiary due to such Accountholder s death, is subject to Puerto Rico inheritance and other applicable laws and regulations. Puerto Rico Estate Taxes. The transfer by death of the Accountholder s Non-Deductible IRA will not be subject to the estate tax imposed by the PR-IRC if the Accountholder is (i) a U.S. citizen who acquired such citizenship solely due to birth or residence in Puerto Rico, and (ii) a resident of Puerto Rico at the time of death. No Capital Gains Treatment. A lump sum distribution from an Accountholder s Non-Deductible IRA is not eligible for capital gains treatment for Puerto Rico income tax purposes. IRA may not be used as collateral In general, an Accountholder s interest in a Non- Deductible IRA or in assets held in such Non-Deductible IRA may not be used as security for a loan, and any amount so utilized shall be deemed to have been distributed to such Accountholder (see Distributions ) and may be subject to the 10% penalty for early distributions described above. Taxation of a Non-Deductible IRA A Non-Deductible IRA is not subject to Puerto Rico income tax. However, income generated by assets held in a Non- Deductible IRA upon a Non-Qualifying Distribution, whether actually made or treated as made under the PR- IRC, or deemed distributions occurring as a result of excess Non-Deductible IRA Contributions or the use of a Non-Deductible IRA as collateral in contravention with the PR-IRC prohibition (other than as provided above), will be subject to Puerto Rico income tax and applicable penalties as provided above. Fees and Expenses Early Withdrawal Charge. In addition to any penalties applicable to early distributions from a Non- Deductible IRA, including the early distribution penalty described above, an Accountholder acknowledges and agrees to the following early withdrawal charges that are applicable to the Non-Deductible IRA Contributions when such contributions are withdrawn from the UBS Non- Deductible IRA within certain periods of time after its opening, for any reason other than the following: (i) an Accountholder attaining 60 years of age; (ii) an Accountholder s death; (iii) an Accountholder s disability; (iv) the unemployment of an Accountholder; (v) the repair or reconstruction of an Accountholder s principal residence as a result of fire, hurricane, earthquake or other fortuitous cause; (vi) to prevent the imminent foreclosure of an Accountholder s principal residence or delays in the payment of the corresponding mortgage; or (vii) to cover medical expenses related to treatment of a severe, chronic, degenerative, or terminal illness of an Accountholder or a covered relative, as described above. UBS Trust may waive or reduce such early withdrawal charges at its discretion and will waive them with respect to (i) new IRA Contributions which are invested in the Shares or (ii) any Shares purchased with the proceeds derived from the sale of shares of common stock issued, and cash dividends declared, by closed-end investment companies sponsored or cosponsored by UBS Financial Services Incorporated of Puerto Rico which were previously offered as investment alternatives to Accountholders. However, early withdrawal charges will apply to any Shares purchased with the redemption proceeds derived from the UBS IRA Select Growth & Income Puerto Rico Fund, unless otherwise waived by UBS Trust PR at its discretion. 4

5 Withdrawal made during the following year after the date that the IRA Contribution was made First year 4% Second year 3% Third year 2% Fourth year 1% After the fourth year 0% Early Withdrawal Charge as a Percentage of the IRA Contribution Other Fees and Expenses. Additional fees and expenses may be charged to the UBS Non-Deductible IRA for special services. In addition, the investments selected by an Accountholder may be subject to the fees and expenses attributable to such investments. Trustee UBS Trust acts as the UBS Non-Deductible IRA s trustee. Reports The Trustee will send to Accountholders quarterly and annual statements covering transactions made with respect to the UBS Non-Deductible IRA. Such reports will indicate the amount of any distributions, withdrawals, or transfers made to or from the UBS Non-Deductible IRA or any interest or other credit earned and charges made to the UBS Non-Deductible IRA. The Trustee will also send copies of the annual reports of the issuers of the Shares in which an Accountholder invests. United States Federal Income Taxes In general, a person that is an Accountholder (including beneficiaries thereof) will not be subject to U.S. Federal income tax with respect to income earned by a Non- Deductible IRA or distributions received from a Non- Deductible IRA, provided that for each entire taxable year that such person is an Accountholder, he or she is a bona fide resident of Puerto Rico as determined under Section 933 of the United States Internal Revenue Code of 1986, as amended (the U.S.-IRC ). Special rules may apply to an Accountholder that, through the IRA Trust, owns 10% or more of the voting stock of the investment company in which the IRA Trust invests. Accountholders are encouraged to consult their own tax and legal advisors to determine whether such is the case, as well as any other U.S. Federal tax consequence as applicable to any given Accountholder. A U.S. non-deductible/roth individual retirement account ( U.S. ROTH IRA ) maintained under the U.S.-IRC is not a Non-Deductible IRA under the PR- IRC, and therefore: (i) the earnings derived by the U.S. ROTH IRA may be currently subject to income tax under the PR-IRC as ordinary income, (ii) any distributions received from a U.S. ROTH IRA may not be contributed to a Non-Deductible IRA in the form of a Rollover Contribution, and (iii) a distribution from a Non-Deductible IRA that is contributed to a U.S. IRA will not qualify for the Rollover Contribution rules described herein and will not qualify as a rollover contribution to a U.S. IRA. Changes in Applicable Law Legislation, including taxation rules, affecting IRAs are continually being considered by the Puerto Rico Legislature. No assurance can be given that any legislation or regulation that may be subsequently promulgated will not have an adverse effect on the operations of the Trustee, or the tax consequences to the Accountholders or Electing Accountholders. If you have any questions regarding your eligibility, tax status, or any other matters after reviewing the UBS Non-Deductible IRA Disclosure Statement, you are encouraged to contact your tax and legal advisors UBS Trust Company of Puerto Rico. All rights reserved. UBS Trust Company of Puerto Rico is an affiliate of UBS Financial Services Incorporated of Puerto Rico. UBS Trust Company of Puerto Rico ubs.com/fs