Disclosure Statement

A disclosure statement is a document explaining the rules of an IRA in plain, nontechnical language. A plan administrator must provide a disclosure statement to the IRA owner at least seven days before the IRA is established, or can provide it at the time the IRA is established if the IRA owner is given seven days within which he/she may revoke the IRA.

A disclosure statement is also a document outlining the specific terms and conditions of a loan, including its interest rate, any fees, the amount borrowed, insurance, and any prepayment rights and the responsibilities of the borrower.

In the first instance (above), the disclosure statement must include information relating to IRA fees, IRA distribution rules and penalties, eligibility requirements for establishing an IRA and the general rules of an IRA. By contrast, in the second case, the lender must send this document to the borrower before the loan proceeds are disbursed.

There are several types of disclosure statements to match different forms of retirement accounts. Traditional IRAs allow individuals to direct pretax income towards investments that can grow tax-deferred. An alternative, the Roth IRA accepts after-tax contributions. Investments that grow within Roth IRAs are not taxed upon withdrawal. The 401(k) plan is a defined contribution (DC) plan in which an employer helps sponsors employees’ retirement (often after a set period of vesting). Other types of employer-sponsored plans include the SIMPLE IRA and SEP IRA.

Disclosure statements for all of these plans must clearly spell out who contributes to the plan, contribution limits, if contributions are pre or after-tax, if investments grow tax-deferred, and when it is appropriate to begin withdrawals without penalty. If an individual does withdraw funds prematurely, disclosure statements should detail additional penalties. Disclosure statements may also define the types of investment options available to plan participants, their historical performance(s), and the risks involved, along with further information on how to learn more.

In mortgages, student loans, small business loans, auto loans, and personal loans, disclosure statements must accompany the contract. These spell out the loan terms, including the annual percentage rate or APR, finance charges, the full amount of the financing, any up-front payments, penalties for late charges, collateral, options for grace period(s) or loan deferment, and what happens in the case of a loan default.