2023 Laws of Puerto Rico › TITLE THIRTEEN - Taxation and Finance (§§ 1 — 33423) › Subtitle 17 - Internal Revenue Code of 2011 (§§ 30001 — 33423) › PART II - Income Taxes (§§ 30041 — 30622) › Chapter 1010 - Estates and Trusts (§§ 30391 — 30419) › Subchapter A - Employee Trusts (§§ 30391 — 30396) › § 30392 - Individual retirement accounts

(a) For purposes of this section, the term “individual retirement account” shall mean a trust created or organized under the laws of the Government of Puerto Rico for the exclusive benefit of an individual or his/her beneficiaries, or the share of the individual for his/her exclusive benefit or that of his/her beneficiaries in a trust created or organized under the laws of the Government of Puerto Rico, and whose governing instrument states that the participants shall be those individuals who, through a contract or request to such effect avail themselves of the provisions of said trust, provided that the instrument creating the trust meets the following requirements:
(1) That, except in the case of a rollover, described in subsection (d)(4), every contribution to the fund shall be in cash and not exceed the amount allowed as a deduction pursuant to § 30135(a)(7) of this title, per taxable year on behalf of any individual.
(2) That the fund be administered by a bank, savings and loan association, savings bank, securities brokerage house, trust company, insurance company, federation of credit and savings unions, credit and savings union, or life insurance cooperative, which demonstrates to the satisfaction of the Commissioner of Financial Institutions that the system whereby the trust shall be administered shall be consistent with the requirements of this section. The federations of credit and savings cooperatives and the credit and savings cooperatives which this subsection refers to include both federal and local ones the depositor accounts of which are secured by the credit and savings cooperatives” shares and deposits fund, or pursuant to the provisions of Act No. 99 of June 4, 1980, or insured by the National Credit Union Administration of the Federal Government as provided by the Federal Credit Union Act (P.L. 86-354, 12 U.S.C. § 1751), whichever the case may be.
(3) Investment requirements.—
(A) That thirty-four percent (34%) or more of the contributions received pursuant to subsections (a)(1) and (d)(4) of this section, and § 30391(b)(2) of this title, may be invested in obligations of the Government of Puerto Rico or any of its instrumentalities or political subdivisions, or in mortgage loans constituted for the financing of construction or the acquisition of residential properties in Puerto Rico, or in loans enabled to special employee-owned corporations, their members or stockholders in accordance with the purposes established in paragraphs (L) and (M) of subsection (a)(3) of § 30102 of this title.
(B) That not more than sixty six percent (66%) of the contributions received pursuant to subsections (a)(1) and (d)(4) of this section, and § 30391(b)(2) of this title, be invested in general assets in Puerto Rico, pursuant to the regulations that to these effects shall be promulgated by the Commissioner of Financial Institutions. For purposes of this paragraph, the stock of domestic corporations registered in the capital stock index of Puerto Rico of the Government Development Bank for Puerto Rico shall be deemed to be general assets in Puerto Rico.
(C) Up to thirty three percent (33%) of the contributions received pursuant to subsections (a)(1) and (d)(4) of this section, and § 30391(b)(2) of this title, be invested in assets in the United States, including capital stock and investment grade assets, pursuant to the regulations to be promulgated by the Commissioner of Financial Institutions.
(D) A trustee who invests in stock of an investment company organized and authorized to operate as such under the Investment Companies Act of Puerto Rico shall rate, with respect to said investment, with the investment requirements established in the preceding paragraphs (A), (B) and (C), provided that the product of said investment by the investment company is designated by said company to be invested according to said subsections and that said company meets all the requirements of the regulations to be adopted by the Commissioner pursuant to the authority conferred in the same. A bank or institution authorized to do trust business in Puerto Rico may invest the funds of their individual retirement accounts through one or several common investment funds as authorized by this Code.
(E) The trustees shall meet the investment requirements of the preceding paragraphs (A), (B) and (C) if they deposit the income generated by the individual retirement accounts in the institutions described in subsection (a)(2) which, in turn, invest said income as required by paragraphs (A), (B) and (C).
(F) The income derived from the securities described in the preceding paragraphs (A), (B) and (C) shall be reinvested in any of the assets described under the subsection corresponding to the asset that generated said income.
(4) That the interest of an individual in the balance of his/her account is irrevocable and non-transferable.
(5) That the assets of said trust be held in a common trust fund or common investment fund for these purposes, but separate accounting shall be held for each trust.
(6) That the entire interest of the owner be distributed on or before the close of the taxable year in which he/she attains the age of seventy-five (75) years, or shall be distributed according to the regulations approved by the Secretary to such effect, which shall prescribe for such interest to be distributed during:
(A) The life of the owner or his/her life and that of his/her spouse.
(B) A term that shall not extend beyond the life expectancy of the owner or the life expectancy of the owner and his/her spouse.
In the case of fixed-term individual retirement accounts for which the interest is available to be distributed within the term agreed at the time the individual retirement account is established, the participants shall be notified thirty (30) days before its expiration date by the entity managing the fund.
(7) That if the individual for whose benefit the trust is maintained dies before the entirety of his/her interest in the trust has been distributed, or when the distribution of the benefits of the trust would have begun for the benefit of the surviving spouse, in accordance with clause (6), and the latter dies before the totality of the benefits has been distributed to him/her, then the total undistributed interest shall be distributed within a period of five (5) years as of the date of the death of the trust’s owner, or that of the surviving spouse. The preceding provision shall not be applicable if, prior to the death of the owner, the distribution of the benefits of the contract had been initiated on the basis of a fixed term, insofar as said term would have been allowed under clause (6) of this subsection.
(8) That no part of the trust funds be invested in life insurance contracts.
(b) For purposes of this section, the term “individual retirement account” shall also mean an “individual retirement annuity”. An “individual retirement annuity” means an annuity contract or an endowment contract, as determined by regulations promulgated by the Secretary, issued by a life insurance company or life insurance cooperative duly authorized by the Government of Puerto Rico to do business in Puerto Rico, and which meets the following requirements:
(1) That the contract is not transferable by the owner.
(2) That under the contract:
(A) The premiums are not fixed;
(B) the annual premium on behalf of any individual shall not exceed the amount allowable as a deduction pursuant to § 30135(a)(7) of this title;
(C) in the case of married individuals who file a joint return under § 30241 of this title, the annual premium regarding each spouse shall not exceed the permissible amount as deduction pursuant to § 30135(a)(7) of this title, and
(D) any refund of premiums shall be applied before the close of the calendar year following the year of the refund toward the payment of future premiums or the purchase of additional benefits.
(3) That the entire interest of the owner will be distributed on or before the close of the taxable year in which he/she attains the age of seventy-five (75), or shall be distributed according to the regulations that the Secretary may prescribe to such effects:
(A) During the life of the owner or the lives of said owner and his/her spouse, or
(B) during a period not to extend beyond the life expectancy of such owner or the life expectancy of said owner and his/her spouse.
(4) That, if the owner dies before the entirety of his/her interest in the policy has been distributed, or if the distribution of the contract’s benefits had begun for the benefit of his/her surviving spouse, as provided in the preceding clause (3), and the latter dies before the entirety of the benefits of the policy have been distributed to him/her, then the total undistributed interest shall be distributed within a period of five (5) years as of the date of the demise of the owner or of the surviving spouse. The preceding sentence shall not be applicable if, prior to the death of the owner, the distribution of the benefits of the policy had been initiated on the basis of a fixed term, insofar as said term is one of those allowed under the preceding clause (3).
(5) That the interest of the owner shall be nonforfeitable, in whole or in part.
(6) That one hundred percent (100%) of the premiums received as contributions described in subsections (a)(1) and (d)(4) of this section, and § 30391(b)(2) of this title, be invested according to the provisions of §§ 101 et seq. of Title 26, known as the “Insurance Code of Puerto Rico”. Should the investment requirements provided in the Insurance Code of Puerto Rico not be complied with, it shall be necessary to comply with the investment requirements described below:
(A) That thirty four percent (34%) or more of the premiums received as contributions described in subsections (a)(1) and (d)(4) of this section, and in § 30391(b)(2) of this title, shall be invested in obligations of the Government of Puerto Rico or of any of its instrumentalities or political subdivisions, or in mortgage loans executed for financing the construction or acquisition of residential properties.
(B) That not more than sixty six percent (66%) of the premiums received as contributions described in subsections (a)(1) and (d)(4) of this section, and in § 30391(b)(2) of this title, shall be invested in general assets in Puerto Rico, pursuant to the regulations that to such effects shall be promulgated by the Commissioner of Insurance together with the Commissioner of Financial Institutions. For these purposes, shares in domestic corporations registered in the Puerto Rico index of capital stock of the Government Development Bank for Puerto Rico shall be deemed general assets in Puerto Rico.
(C) Up to thirty three percent (33%) of the premiums received as contributions described in subsections (a)(1) and (d)(4) of this section, and in § 30391(b)(2) of this title, may be invested in assets in the United States, including capital stock and investment grade assets, pursuant to the regulations to be promulgated by the Commissioner of Insurance together with the Commissioner of Financial Institutions.
(D) The income derived from securities that qualify for the investment portfolios of thirty four percent (34%) or more, up to sixty six percent (66%) or up to thirty three percent (33%) of the premiums, as described above, must be reinvested in any of the assets described in the portfolio corresponding to the asset that generated such an income. It shall be the responsibility of both the Commissioner of Financial Institutions and the Commissioner of Insurance of the Commonwealth of Puerto Rico to ensure faithful compliance with the provisions of this clause.
(7) The term “individual retirement annuity” does not include an annuity contract for any taxable year of the owner in which he/she is disqualified on the application of subsection (e) or for any subsequent taxable year. For purposes of this subsection, no contract shall be treated as an endowment contract if it matures on or before the taxable year in which the individual in whose name such contract is purchased attains the age of seventy-five (75), and if it is not for the exclusive benefit of the individual in whose name it is purchased, or his/her beneficiaries, and only if the aggregate annual premiums under all such contracts do not exceed the amount allowed as deduction pursuant to § 30135 of this title.
(c) Accounts established by employers and certain employee associations.— A trust created or organized under the laws of the Government of Puerto Rico by an employer for the exclusive benefit of his/her employees or their beneficiaries, or by an employee association, which may include owner-employee individuals, for the exclusive use of its members or their beneficiaries, shall be treated as an individual retirement account, as defined in subsection (a), but only if the written governing instrument creating the trust meets the following requirements:
(1) The trust meets the requirements of subsection (a).
(2) There is a separate accounting for the interest of each employee or member. The assets of the trust may be held in a common fund for the account of all individuals who have an interest in the trust.
(d) Distribution of individual retirement account assets.—
(1) Taxing of payments or distributions out of an individual retirement account.—
(A) Unless otherwise provided in this subsection, any amount paid or distributed out of an individual retirement account shall be included in gross retirement income by the payee or distributee in the taxable year during which the payment or distribution is received. The basis of any person in said account is zero, increased by the proportion of tax exempt income derived from these funds. In case a partial distribution is made, the basis, if any, shall be prorated.
(B) That portion of any amount paid or distributed out of an individual retirement account that consists of the interest described in § 30044 of this title shall be subject to the provisions of said § 30044 of this title for the taxable year in which the owner or beneficiary of an individual retirement account actually receives such interest in total or partial distribution of an individual retirement account.
(C) Seventeen-percent (17%) special tax).—
(i) The owner or beneficiary of an individual retirement account who receives a total or partial distribution from an individual retirement account which does not constitute a distribution of interest described in § 30084 of this title, nor a distribution of his/her contribution to the individual retirement account, and which consists of income from sources within Puerto Rico, as defined in subparagraph (ii) of this paragraph, received by said individual retirement account, may opt to pay a tax on said amount, in lieu of any other tax imposed by this part, equal to seventeen percent (17%) for the taxable year in which the owner or beneficiary of the individual retirement account actually receives said total or partial distribution. If the owner or beneficiary of the individual retirement account opts to pay the seventeen percent (17%) tax provided in this subparagraph (i), the trustee of the individual retirement account shall be required to deduct and withhold the seventeen percent (17%) tax of the distributed amount. The trustee shall not be required to make the deduction and withholding provided herein if the distribution qualifies as a rollover under § 30392(d)(4) of this title, and the distribution is made directly by the trustee to the trustee of another individual retirement account by the instructions of the owner or beneficiary thereof.
(ii) The term “income from sources within Puerto Rico” shall be defined, for purposes of this section, according to the regulations, circular letter, or other administrative determination of general application promulgated by the Secretary. In these regulations, circular letter, or other administrative determination of general application, the Secretary shall give similar treatment, for purposes of this paragraph, to the distributions on the shares in common or collective investment trusts maintained by a bank or trust company organized under the laws of Puerto Rico for the investment of common or collective investment trust funds of individual retirement accounts and the dividends distributed by registered investment companies.
(D) Notwithstanding the provisions of paragraphs (B) and (C) of this clause, the owner or beneficiary of an individual retirement account who receives a total or partial distribution from an individual retirement account which does not constitute a distribution of his/her contribution to the individual retirement account, may opt to pay a tax equal to ten percent (10%) on said account in lieu of any other contribution imposed by this part, for the taxable year in which the owner or beneficiary of the individual retirement account actually receives said total or partial distribution, provided that he/she is enjoying the retirement benefits offered by the Retirement System of the Government of Puerto Rico and its instrumentalities, the Judiciary Retirement System, and the Teachers’ Retirement System. If the owner or beneficiary of the individual retirement account opts to pay the ten percent (10%)-tax provided in this paragraph, the trustee of the individual retirement account shall be required to deduct and withhold a ten percent (10%)-tax from the distributed amount.
(E) Requirements to avail him/herself of the seventeen percent (17%) or ten percent (10%)-tax.— The option to pay the seventeen percent (17%)-tax provided in § 30084 of this title, or the ten percent (10%)-tax provided in paragraph (D), may be made at any time before the trustee of the individual retirement account makes the payment or distribution out of the individual retirement account.
(F) Requirement to pay or deposit deducted or withheld taxes.— Every trustee of an individual retirement account who is required to deduct and withhold the tax provided in paragraph (C)(i), and in paragraph (D), shall pay the amount of the tax thus deducted and withheld in the Internal Revenue Collection Centers of Puerto Rico, in the Department of the Treasury, or deposit it in any of the banking institutions designated as receivers of public funds authorized by the Secretary to receive such tax. The tax shall be paid or deposited on or before the tenth (10th) day of the month following the date the distribution was made.
(G) No withholding.— If the trustee of the individual retirement account, in violation of the provisions of this subsection, fails to make the withholding referred to in paragraph (C), the amount that should have been deducted and withheld (unless the receiver of the distribution pays the tax to the Secretary) shall be collected from the trustee of the individual retirement account following the same procedure and in the same way as if it were a tax owed by the trustee.
(H) Penalty.— For the provisions regarding penalties and surtaxes, see §§ 33001 et seq. of this title.
(2) Excess contributions returned before the due date of return.— The provisions of clause (1) of this subsection do not apply to the reimbursement of any contribution made during a taxable year to an individual retirement account to the extent that said contribution exceeds the amount allowable as a deduction under § 30135(a)(7) of this title, if:
(A) Said reimbursement is received on or before the day prescribed by law (including extensions of time) for filing such individual’s income tax return for such taxable year;
(B) no deduction is allowed under § 30135(a)(7) of this title with respect to such excess contributions, and
(C) such reimbursement is accompanied by the amount of the net income attributable to such excess contribution. Any net income described in this paragraph shall be included as the individual’s income for the taxable year in which such contribution was made. Any reimbursement during the taxable year that corresponds to interests as described in § 30084 of this title, and to income described in subsection (d)(1)(C) of this section, shall be taxed according to the provisions of § 30084 of this title and subsection (d)(1)(C) of this section, provided that the requirements of § 30084 of this title and § 30392(d) of this title, respectively, are met.
(3) Transfer of an individual retirement account incident to divorce.— The transfer of an individual’s interest in an individual retirement account to his/her former spouse under a divorce decree or separation instrument shall not be considered as a taxable transfer made by such individual notwithstanding any other provision of this part, and such interest at the time of the transfer shall be treated as an individual retirement account of such spouse and not of such individual. Thereafter, such account, for purposes of this part, shall be treated as maintained for the benefit of such spouse.
(4) Rollover contribution.— Any amount paid or distributed shall be treated as a rollover contribution under this clause if it meets the requirements of paragraphs (A) and (B).
(A) In general.— The provisions of the preceding clause (1) shall not apply to any amount paid or distributed out of an individual retirement account to the individual for whose benefit the account is maintained if the total or partial amount received (including money or any other type of property) is paid to an individual retirement account (other than an endowment contract) or to a nondeductible individual retirement account for the benefit of such individual or to the Government of Puerto Rico Employees Retirement System, be it from an individual retirement account of the individual or an individual retirement account of his/her spouse, not later than sixty (60) days after having received said payment or distribution. The preceding notwithstanding, rollover contributions to nondeductible individual retirement accounts shall be subject to the taxes provided in § 30394(d)(4) of this title and, for purposes of this paragraph, it shall be deemed that the requirements of the same are met if an amount equal to the entire amount received from the individual retirement account reduced by the tax provided in said § 30393(d)(4) of this title that has been withheld as provided therein is paid into a nondeductible individual retirement account.
(B) Limitation.— The provisions of this clause shall not apply to any amount described in paragraph (A) of this clause, received by an individual from an individual retirement account, if at any time during the year preceding the day on which such amount was received, such individual received any other amount from an individual retirement account which was not includible in his/her gross income because of the application of this clause.
(5) Distribution of annuity contracts.— The provisions contained in clause (1) of this subsection shall not apply to an annuity contract that meets the requirements of clauses (1), (3), (4) and (5) of subsection (b) of this section and that is distributed from an individual retirement account.
(6) Distribution for the purchase or construction of a residence.— The provisions of clause (1) of this subsection shall not apply to any amount distributed from an individual retirement account which is used for the acquisition or construction of a property to be used as the first principal residence of the taxpayer, subject to the following conditions:
(A) The taxpayer shall certify to the trustee of the individual retirement account that the amount which is distributed shall be used for the acquisition or construction of his/her first principal residence and that, before the date of the distribution, such individual has not been the owner of a residential property which he/she has utilized as his/her principal residence;
(B) the entire amount received shall be used for that purpose not later than fifteen (15) days after having received such distribution, and
(C) in the deed of purchase there shall be recorded the cost of purchase of the residence that has been paid out of funds of the individual retirement account, as well as the number of such account.
For purposes of this clause, the term “first principal residence” means the first property owned by an individual that is used by him/her as his/her principal residence.
The amount distributed in accordance with this clause shall not be treated as a distribution subject to taxation in the year in which it is received, but rather its taxation is deferred. In such case, the distribution whose treatment as income has been deferred, shall be treated as ordinary income in the sale or other disposition of the residence thus acquired or built, regardless of whether such disposition has resulted in gain or loss and of the provisions of subsections (a)(16) and (m) of § 30102 of this title.
(e) Tax Treatment of individual retirement accounts.—
(1) Tax exemption.— Any individual retirement account shall be exempt from taxation under this part unless such account has ceased to be an individual retirement account by reason of clause (2) or (3) of this subsection. Notwithstanding the preceding sentence, any such account shall be subject to the taxes imposed by § 30481(a) of this title.
(2) Loss of exemption of an account when a prohibited transaction occurs.—
(A) In general.— If, during any taxable year of the individual for whose benefit any individual retirement account is established, that individual or his/her beneficiary engages in any “prohibited transaction”, as this term is defined in § 30412(f)(2)(B) of this title, with respect to said account, such account shall cease to be an individual retirement account as of the first day of such taxable year, and for purposes of this paragraph:
(i) The individual for whose benefit any account was established is treated as the owner of such account, and
(ii) the separate account for any individual within an individual retirement account maintained by an employer or employee association shall be treated as a separate individual retirement account.
(B) Account treated as distributing all its assets.— In any case in which any account ceases to be an individual retirement account by reason of paragraph (A), it shall be treated, as of the first day of such taxable year, as if there were a distribution in an amount equal to the fair market value of all assets in the account on such date.
(3) Effect of pledging an individual retirement account as collateral.—
(A) If, during any taxable year of the individual for whose benefit an individual retirement account is established, that individual uses the account, totally or partially, as collateral for a loan, the portion thus used shall be treated as distributed to such individual.
(B) If, during any taxable year, the owner of an individual retirement annuity borrows any money under or by use of such contract, the contract ceases to be an individual retirement account for purposes of § 30084 of this title, as of the first day of such taxable year. Such owner shall include in his/her gross income for such year, an amount equal to the fair market value of such contract as of such first day of said year.
(4) Withdrawal of contributions and closing of the account.— If, at any time during the first seven working days after opening an individual retirement account, the person or entity that opened the account decides not to continue it, said person or entity may withdraw any contribution made to the account and close it without the application of the provisions of this section and § 30135(a)(7) of this title.
(f) Reports.—
(1) Every trustee of an individual retirement account created under the terms of subsection (a) and the every life insurance company or cooperative that issues an endowment contract or an individual retirement annuity under the terms of subsection (b) shall make reports to the Secretary and to the individuals for whom the account, endowment contract, or annuity is maintained. Such reports shall be made with respect to the contributions, distributions and such other matters as the Secretary may require through regulations. The reports required in accordance with this subsection shall be filed on such date and manner as required by said regulations.
(2) Any trustee or life insurance company or cooperative which, after being notified by the Secretary of any noncompliance with preceding clause (1), once again fails to comply with the same shall lose his/her eligibility to act as trustee with respect to any individual retirement account, as of the determination of said noncompliance. The Secretary shall require the transfer of all individual retirement accounts administered by the disqualified trustee, company, or cooperative, to any other trustee to be selected by the participant. This change of trustee whereby the funds are transferred directly from the administration of a trustee authorized to accept individual retirement accounts to another, without there being any distribution whatsoever to the individual in whose benefit the account is maintained, shall not be treated as a payment, distribution, or reimbursement and shall not be subject to taxation or to the ten-percent (10%) penalty provided in subsection (g).
(g) Penalties for distributions prior to attaining the age of Sixty (60).—
(1) Any amount distributed, or deemed to be distributed, in accordance with the provisions of this section, before the beneficiary of the individual retirement account attains the age of sixty (60) years shall be subject to a penalty of an amount equal to ten percent (10%) of the amount distributed which is includable as income in said year. The preceding ten percent (10%) penalty shall be withheld by the trustee and sent to the Secretary, in accordance with the provisions of § 30271 of this title.
(2) The provisions of the preceding clause (1) shall not apply in the following situations:
(A) In the case that the amount paid or distributed, or considered as distributed, pursuant to subsection (d) is attributed to a taxpayer who became disabled.
(i) An individual shall be deemed to be disabled if he/she is incapable of being employed in any significant lucrative activity, due to a medically-determined disability, whether it be physical or mental, which is expected to have a long or indefinite duration or that may result in death.
(ii) An individual shall not be deemed to be disabled unless he/she proves his/her disability in the form and manner required by the Secretary.
(B) When the Secretary, through regulation to such effects, exempts a taxpayer who is forced to make withdrawals in advance due to the loss of his/her employment or the need of funds to cover the expenses of the university studies of his/her direct dependents.
(C) In those cases in which the taxpayer withdraws funds for the purchase or construction of the first principal residence, subject to the provisions of subsection (d)(6) of this section.
(D) In those cases in which the taxpayer withdraws funds for the repair or reconstruction of his/her principal residence that has been affected by a fire, a hurricane, an earthquake, or other fortuitous cause; or when he/she withdraws funds to avoid the foreclosure of the mortgage, or default thereof, of his/her principal residence, including refinancing, due to loss of employment or a verifiable substantial reduction of income; subject to the presentation of evidence of such need, circumstance, and use, provided, that in this last case, and regarding refinancing to avoid default, the person may withdraw up to half of the funds deposited in each financial institution, or up to twenty thousand dollars ($20,000), whichever is greater.
(E) In those cases in which the taxpayer withdraws up to the maximum amount of one thousand two hundred dollars ($1,200) for the acquisition or purchase of a computer for the enjoyment of a dependent to the second degree of consanguinity who is pursuing studies up to university level. This withdrawal may only be made once (1) every six (6) years.
(F) In those cases in which the taxpayer withdraws the funds for the treatment of severe, chronic, degenerative, and terminal illness of any family member, up to the fourth degree of consanguinity and the second degree of affinity. For purposes of this section, a severe, chronic, degenerative, and terminal illness is a disease whose foreseeable effect, as certified by a physician, is the loss of life or the permanent physical disability of the patient.
History —Jan. 31, 2011, No. 1, § 1081.02, retroactive to Jan. 1, 2011; Dec. 10, 2011, No. 232, § 96.