IRA Disclosure Statement

Transcription

1 UBS Trust Company of Puerto Rico IRA Disclosure Statement UBS Trust Company of Puerto Rico ( UBS Trust or the Trustee ), as trustee of the UBS Puerto Rico Individual Retirement Account ( UBS IRA ), must furnish each participant (each such participant, an Accountholder ) with a disclosure statement containing certain general legal and tax information pertaining to Puerto Rico individual retirement accounts ( IRA or 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 an 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 AN IRA. NEITHER THE UBS 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 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 IRA, without any penalties, within seven (7) business days following the opening of your UBS 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 to the UBS IRA 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 tax-deductible contributions to an IRA (the IRA Contributions ). The total amount of the permissible annual IRA Contributions is deductible by an Accountholder in computing his/her taxable income for Puerto Rico income tax purposes for the year with respect to which the IRA Contributions are made.

2 Eligibility The only requirements for eligibility for the UBS IRA are that you be an individual who has not attained the age of 75 years in the taxable year for which you will be claiming a deduction for the IRA Contribution, 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 self- employment 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, an 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 Electing Accountholders, the 1994 Code provides that annual IRA Contributions made to an 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. Furthermore, the 2011 Code provides that if an individual is entitled to make elective deferrals in a Qualified Plan that is also a 401(k) plan for U.S. federal income tax purposes, the maximum amount that the individual may contribute to an IRA and the Qualified Plan for the 2015 taxable year is $20, (the Combined Limitation Amount ). The Combined Limitation Amount does not limit the amount that the 2011 Code allows for catch-up contributions that may be made by individuals who participate in a plan that contains a cash or deferred contribution arrangement and that have attained the age of 50 years by the close of the plan year. Electing Accountholders should 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 IRA no longer apply. Non-transferable and Non-forfeitable You may not transfer ownership of your 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 IRA that is non-forfeitable. Contributions and Deductions The aggregate permissible maximum annual contribution to one or more 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 an additional $5,000 (or such maximum annual contribution as may be allowed in any future taxable year) to separate IRAs 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 total contribution does not exceed the lesser of (i) $10,000 (or such maximum annual contribution as may be allowed in any future taxable year) or (ii) their combined adjusted gross income received from salaries or earnings attributed to professions or occupations for the given year. Furthermore, the maximum amount that may be contributed to IRAs for a taxable year may be reduced by the amount that the taxpayer has contributed to a non-deductible individual retirement account ( Non- Deductible IRA ) established under Section of the 2011 Code (or Section 1169B of the 1994 Code in the case of an Electing Accountholder) for such taxable year and contributions to any other IRAs established under Section of the 2011 Code (or Section 1169 of the 1994 Code in the case of an Electing Accountholder). In such regard, you are encouraged to contact your tax and legal advisors. No IRA Contributions Permitted in Taxable Year in which an Accountholder Attains 75 Years of Age. No IRA Contributions (except a Rollover Contribution as defined below) may be made to an IRA for the taxable year in which an Accountholder attains 75 years of age or thereafter. Deadline for IRA Contributions. IRA Contributions by an Accountholder for a given taxable year must be made by no later than the date prescribed by the PR-IRC for such Accountholder to file his/her Puerto Rico income tax return for that year (including any applicable extension to the time for filing). Rollover Contribution Under certain rules, amounts distributed from an IRA established by an Accountholder or 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 ) may be contributed to another IRA established by such Accountholder (these IRA Contributions being referred to as Rollover Contributions ), provided the total amount distributed from the IRA or Qualified Plan is so contributed within 60 days of the receipt of the distribution. However, a Rollover Contribution is not tax-deductible for the year with respect to which such Rollover Contribution is made. If the amounts distributed from an IRA established by an Accountholder or from a Qualified Plan is not contributed to an IRA on a timely basis, the distribution may not be contributed to an IRA and will be subject to Puerto Rico income tax and applicable penalties, as described herein under Distributions and Premature Distributions. In addition, adverse consequences that pertain to excess IRA Contributions could also apply. Only one transfer from one IRA to another IRA can be made in any one-year period ending on the date of receipt of the distribution being transferred. If a transfer is made directly between IRA trustees, this one-year restriction will not apply. It is important to note that in the case of an Accountholder that has more than one IRA, the one-year period is applied by treating 2

3 all of the IRAs as one IRA. For example, if an Accountholder receives a distribution (the First Distribution ) from an IRA and makes a Rollover Contribution, the Accountholder may not make a Rollover Contribution with respect to a distribution from another IRA until the expiration of the one-year period corresponding to the First Distribution. A Rollover Contribution from a Qualified Plan may also be made within 60 days of its distribution. If the Rollover Contribution from a Qualified Plan is not timely made, the distribution from the Qualified Plan may not be contributed to an IRA and will be subject to Puerto Rico income tax under the rules provided by Section of the 2011 Code (or Section 1165 of the 1994 in the case of an Electing Accountholder). Excess IRA Contributions If an Accountholder contributes an amount to an 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 Puerto Rico income tax return for the year with respect to which the excess IRA Contributions were made (including any applicable extension of the time for filing), the entire balance of such 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 IRA Contributions were made. The amount of an IRA treated as distributed will be subject to the Distribution and Premature Distribution rules described herein. Investments in Life Insurance Not Permitted No part of the IRA Contributions may be invested by an IRA in life insurance policies. Distributions The distribution to an Accountholder of the entire balance in an IRA must be made or commenced by, no later than the end of the year in which such Accountholder reaches 75 years of age. Such distribution must occur at least at a minimum prescribed rate, as further described below. Tax Treatment upon Distributions. Upon an actual or deemed distribution from an IRA (see special rules for Rollover Contributions ), the full amount received or deemed received is subject to Puerto Rico income taxes as follows: (i) the amounts contributed to an IRA, and any income earned by an IRA that is not entitled to reduced tax rates as described below, is subject to Puerto Rico regular income tax rates; (ii) Puerto Rico source income (as determined under the source of income rules of the PR-IRC) earned by an IRA (excluding the interest described in item (v) below) is subject to an optional Puerto Rico income tax of 17% to be withheld at source by the Trustee; (iii) the amount of any income earned by an IRA on tax-exempt investments (but not any gains on the disposition of said investments) is added to the Accountholder s basis in an IRA (which basis is otherwise zero); (iv) in the case of partial distributions, the increase in basis, if any, as contemplated in item (iii) above, will be based on the amount of such partial distribution multiplied by the proportion of income earned by an IRA on tax-exempt investments (but not any gains on the disposition of said investments) to the total account balance of an IRA; (v) subject to the requirements imposed by the PR-IRC, the distribution of any interest earned by an IRA from certain types of deposits with financial institutions is eligible for the Puerto Rico income tax exemption 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 ); (vi) the distribution of such interest as contemplated in item (v) above, in excess of the Annual Exemption, is subject to an optional Puerto Rico income tax withholding of 17%; (vii) subject to the requirements imposed by the PR-IRC, distributions from an IRA of amounts that do not comprise contributions to an 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; and (viii) an Accountholder s prepayment of the 8% Puerto Rico income taxes provided for by Law on amounts accumulated and undistributed in an IRA shall increase the Accountholder s basis in the IRA by the amount over which the prepayment was made. A partial distribution made by an IRA will be treated as being made from the different items that comprise the balance of the account in accordance with the distribution allocation rules provided by the regulations of the PR-IRC. An option to pay the special tax rates described herein must be submitted by the Accountholder to the Trustee prior to receiving a distribution from an IRA. Also, Accountholders who elected to prepay the 8% Puerto Rico income taxes provided for by Law on amounts accumulated and undistributed in an IRA must submit evidence of the prepayment to the Trustee prior to receiving a distribution from an IRA. 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 an IRA, 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 by an IRA from certain types of deposits with financial institutions that were elected to be taxed at the 17% tax rate. Distribution for Purchase or Construction of First Principal Residence. Notwithstanding the preceding, the Puerto Rico income taxation on certain distributions from an IRA will be deferred if an Accountholder uses 3

4 the amount distributed for the purchase or construction of such Accountholder s first principal residence and complies with the applicable requirements of the PR-IRC and regulations. Form of Distributions. The PR-IRC provides that an Accountholder s total interest in an IRA must be distributed on or before the closing of the taxable year in which he or she attains 75 years of age, unless such total interest is distributed in periodic payments commencing in such taxable year over a period not longer than (i) the life of such Accountholder or the lives of such Accountholder and his/her spouse, or (ii) the life expectancy of such Accountholder or the joint life expectancy of such Accountholder and his/her spouse. During the taxable year in which an Accountholder attains 75 years of age, UBS Trust will request instructions from such Accountholder as to the method of distribution of such Accountholder s interest in his/her IRA. If an Accountholder does not choose a method of distribution by the date he/she attains 75 years of age, UBS Trust will commence periodic payment from his/her IRA in the minimum amount permissible by the PR-IRC regulations, by the end of the taxable year in which he/she attains 75 years of age and pending receipt of distribution instructions from such Accountholder. Death of an Accountholder. Upon an Accountholder s death, the entire balance of such Accountholder s IRA must be distributed to such Accountholder s beneficiary or beneficiaries within a period of five 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 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 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 IRA is not eligible for capital gains treatment for Puerto Rico income tax purposes. Premature Distributions Early Distribution Penalty. Distributions from an Accountholder s IRA may be made at any time. However, any actual or deemed distribution before such Accountholder attains 60 years of age is generally subject to a 10% penalty imposed by the PR-IRC, on the part of the distribution that constitutes gross income, unless the distribution is on account of (i) an Accountholder s disability (as defined in the PR-IRC), (ii) an Accountholder s unemployment (as defined in the PR-IRC), (iii) the need of funds to cover the expenses of an Accountholder s direct dependents in connection with their university studies, (iv) the purchase or construction of an Accountholder s first principal residence (subject to compliance with certain requirements of the PR-IRC issued thereunder), (v) the repair or reconstruction of an Accountholder s principal residence as a result of fire, hurricane, earthquake or other fortuitous cause, (vi) 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, (vii) 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 (viii) 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. In addition, the 10% penalty will not apply if the amount distributed is transferred by an Accountholder to another IRA (including nondeductible IRAs) of such Accountholder in a Rollover Contribution (as defined above) within 60 days of such Accountholder s receipt of the distribution or is not included as gross income. Withholding of the Early Distribution Penalty. The 10% penalty will be withheld from a distribution unless an Accountholder provides the required evidence to UBS Trust that the distribution is exempt from the penalty. IRA May Not be Used as Collateral An Accountholder s interest in an IRA or in assets held in such IRA may not be used as security for a loan, and any amount so utilized will be deemed to have been distributed to such Accountholder and may be subject to the 10% penalty for early distributions described above. Required Filings An Accountholder must report annually the IRA Contributions on such Accountholder s Puerto Rico income tax return in order to qualify for the Puerto Rico income tax deduction and benefits of an IRA. Taxation of the IRA No Puerto Rico income taxes are paid on the income generated by the assets held in an IRA until a distribution is actually made or treated as made under the PR-IRC (i.e., deemed distributions occurring as a result of excess IRA contributions or use of an IRA as collateral in contravention of the PR-IRC). 4

5 Fees and Expenses Early Withdrawal Charge. In addition to any penalties applicable to early distributions from an IRA, including the early distribution penalty described above, an Accountholder acknowledges and agrees to the following early withdrawal charges that are applicable to the IRA Contributions, when such contributions are withdrawn 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 co-sponsored 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. 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 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 IRA s trustee. Reports The Trustee will send to an Accountholder quarterly and annual statements covering transactions made with respect to the UBS IRA. Such reports will indicate the amount of any distributions, withdrawals, or transfers made to or from this Non-Deductible IRA or any interest or other credit earned and charges made to this 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 an IRA or distributions received from an 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. individual retirement account ( U.S. IRA ) maintained under the U.S.-IRC is not an IRA under the PR-IRC, and therefore: (i) any amounts contributed to a U.S. IRA will not be deductible for purposes of the PR-IRC, (ii) the earnings derived by a U.S. IRA may be currently subject to income tax under the PR-IRC as ordinary income, (iii) any distributions received from a U.S. IRA may not be contributed to an IRA in the form of a Rollover Contribution, and (iv) a distribution from an 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 this IRA Disclosure Statement, you are encouraged to contact your tax and legal advisors. 5

6 2015 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