Disclosure Statement: What It Means, How It Works

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

David Kindness is a Certified Public Accountant (CPA) and an expert in the fields of financial accounting, corporate and individual tax planning and preparation, and investing and retirement planning. David has helped thousands of clients improve their accounting and financial systems, create budgets, and minimize their taxes.

Betsy began her career in international finance and it has since grown into a comprehensive approach to journalism as she's been able to tap into that experience along with her time spent in academia and professional services.

What Is a Disclosure Statement?

In general, a disclosure statement is a financial document given to a participant in a transaction that spells out key information in plain language.

For retirement accounts, a disclosure statement is a document explaining the rules of financial transactions for the account in plain, nontechnical language. An individual retirement account (IRA) plan administrator must provide a disclosure statement to the IRA owner at least seven days before the IRA is established or at the time the IRA is established, if the IRA owner is given seven days in which to revoke the IRA, if they wish.

A disclosure statement also may refer to 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.

Key Takeaways

• A disclosure statement is a financial document given to a participant in a transaction explaining key information in plain language.
• Disclosure statements for retirement plans must clearly spell out who contributes to the plan, contribution limits, penalties, and tax status.
• Disclosure statements for loans must spell out loan terms, including the annual percentage rate, or APR, charges, and fees.

Understanding Disclosure Statements

In terms of an IRA disclosure statement, it must include information related to IRA fees, distribution rules and penalties, eligibility requirements for establishing an IRA, and its general rules. By contrast, when granting a loan, the lender must send this document to the borrower before the loan proceeds are disbursed.

Retirement Account Disclosure Statements

There are several types of disclosure statements for different forms of retirement accounts. Traditional IRAs allow individuals to direct pretax income toward investments that can grow tax-deferred.

Another alternative, the Roth IRA, accepts after-tax contributions. Investments that grow within Roth IRAs aren't taxed upon withdrawal.

The 401(k) plan is a defined contribution (DC) plan in which an employer helps by contributing toward employees’ retirement savings (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 for retirement accounts may define the types of investment options available to plan participants, their historical performance(s), and the risks involved, along with further information on the securities.

Loan Disclosure Statements

With 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 (APR), finance charges, the full amount of the financing, any up-front payments, penalties for late charges, collateral, options for a grace period(s) or loan deferment, and what happens in the case of loan default.

What Is the Purpose of a Disclosure Statement?

A disclosure statement is a financial document presented to a participant in a transaction that explains key information in plain language. These are provided for retirement plans to spell out the plan's rules, and with the contract for mortgages, auto, personal, and other kinds of loans. They are also usually found with insurance policies, leases, properties up for sale, and more.

What Information Is Found in a Retirement Plan Disclosure Statement?

A retirement plan's disclosure statement should delineate who contributes to the plan, contribution limits, whether contributions are pre- or after-tax, if its investments qualify for tax deferment, and when one can start withdrawals without penalty. If an individual does withdraw funds prematurely, the disclosure statement should detail additional penalties.

How Should You Write a Disclosure Statement?

An effective disclosure statement should do the following:

1. Identify all relevant parties involved.
2. Determine and state the purpose of the disclosure.
3. Outline and provide the information that needs to be included in the disclosure.
4. Be written using straightforward, non-technical, and easy-to-understand language.

The Bottom Line

A disclosure statement is a financial document provided to participants in a transaction that spells out key information in simple, non-technical language. These may be presented for retirement accounts to explain the rules of contributions and withdrawals from the account, among other transactions, often when a new account is established or on a periodic basis once it's established.

A disclosure statement is usually also part of a loan, stating details of the transaction such as the interest rate, fees, the amount borrowed, loan insurance, any prepayment rights, and the borrower's responsibilities.

1. Internal Revenue Service. "Publication 590-A (2023), Contributions to Individual Retirement Arrangements (IRAs)."
2. Internal Revenue Service. “Traditional IRAs.”
3. Internal Revenue Service. "Traditional and Roth IRAs."
4. Internal Revenue Service. "Definitions."
5. Internal Revenue Service. "SIMPLE IRA Plan."
6. Internal Revenue Service. "Simplified Employee Pension Plan (SEP)."

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A rollover IRA is an account that allows for the transfer of assets from an old employer-sponsored retirement account to a traditional IRA.

An IRA transfer is the act of moving funds from an individual retirement account (IRA) to a retirement account, brokerage account, or bank account.

An inherited IRA is an account that must be opened by the beneficiary of a deceased person's IRA. The tax rules are quite complicated.

A conduit IRA is an account used to roll over funds from a qualified retirement plan to another qualified plan.

The Roth ordering rules govern the way in which money in a Roth retirement account is withdrawn and, therefore, determine whether any taxes are due.

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