Tag Archive for: IRA Contribution

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Active Plan Participation May Affect IRA Deductibility

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“Active participation in an employer’s retirement plan can affect whether an IRA contribution made by the participant is deductible on the tax return. What does ‘active participation’ mean?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Minnesota is representative of a common inquiry involving a taxpayer’s ability to make a deductible IRA contribution.

Highlights of Discussion

This is an important tax question that can only be answered definitively by a person’s own tax advisor.  Generally speaking, for purposes of the IRA deduction rules, an individual is an “active participant” for a taxable year if either the individual or the individual’s spouse actively participates during any part of the year in a(n)[1]

  • Qualified plan described in Internal Revenue Code Section [IRC §401(a)], such as a defined benefit, profit sharing, 401(k) or stock bonus plan;
  • Qualified annuity plan described in IRC §403(a);
  • Simplified employee pension (SEP) plan under IRC §408(k);
  • Savings incentive match plan for employees (SIMPLE) IRA under IRC §408(p);
  • Governmental plan established for its employees by the federal, state or local government, or by an agency or instrumentality thereof (other than a plan described in IRC §457);
  • IRC §403(b) plan, either annuity or custodial account; or
  • Trust created before June 25, 1959, as described in IRC §501(c)(18).

When an individual is considered active depends on the type of employer-sponsored plan.

Profit Sharing or Stock Bonus Plan:   During the participant’s taxable year, if he or she receives a contribution or forfeiture allocation, he or she is an active participant for the taxable year.

Voluntary or Mandatory Employee Contributions:  During the participant’s taxable year, if he or she makes voluntary or mandatory employee contributions to a plan, he or she is an active participant for the taxable year.

Defined Benefit Plan: For the plan year ending with or within the individual’s taxable year, if an individual is not excluded under the eligibility provisions of the plan, he or she is an active participant for that taxable year.

Money Purchase Pension Plan: For the plan year ending with or within the individual’s taxable year, if the plan must allocate an employer contribution to an individual’s account he or she is an active participant for the taxable year.

Refer to IRS Notice 87-16 for specific examples of active participation.

As a quick check, Box 13 on an individual’s IRS Form W-2 should contain a check in the “Retirement plan” box if the person is an active participant for the taxable year.

If an individual is an active participant, then the following applies for IRA contribution deductibility.  The maximum traditional IRA contribution for 2020 and 2021 is $6,000 for those under age 50 and $7,000 for those age 50 0r greater.

IF your filing
status is …		 AND your modified adjusted gross income (modified AGI)
is …		 THEN you can take …
single or
head of household		 $65,000 or less a full deduction.
more than $65,000
but less than $75,000*		 a partial deduction.
$75,000 or more no deduction.
married filing jointly or
qualifying widow(er)		 $104,000 or less a full deduction.
more than $104,000
but less than $124,000**		 a partial deduction.
$124,000 or more no deduction.
married filing separately2 less than $10,000 a partial deduction.
$10,000 or more no deduction.
Not covered by a plan, but married filing jointly with a spouse who is covered by a plan  $196,000 or less a full deduction.
  more than $196,000
but less than $206,000***		 a partial deduction.
Source:  IRS 2020 IRA Deduction Limits

 

 $206,000 or more no deduction.
*$66,000-$76,000 for 2021; **$105,000-$125,000 for 2021; and ***$198,000-$208,000 for 2021

 

Conclusion

Participating in certain employer-sponsored retirement plans can affect an individual’s ability to deduct a traditional IRA contribution on an individual’s tax return for the year. The IRS Form W-2 should indicate active participation in an employer-sponsored retirement plan. When in doubt, taxpayers should check with their employers.

 

 

[1] See www.legalbitstream.com for IRS Notice 87-16

 

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CARES Act Payment and IRA Contributions

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“My client wants to know the following:  ‘Can I use my $1,200 Coronavirus Aid, Relief, and Economic Security (CARES) Act payment to make an IRA contribution? My other income comes from Social Security, pension payments and interest income payments.’”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Nevada is representative of a common inquiry related to IRA contributions.

Highlights of the Discussion

Unfortunately, no, the CARES Act payments are actually “Recovery Rebates” or “credit against taxes,” according to Section 2201 of the CARES Act and, therefore, would not be considered earned income for IRA contribution purposes [see Publication 590-A, Contributions to Individual Retirement Arrangements (IRAs)].  An individual must have wages or self-employment income to make an IRA contribution. Wages and self-employment income are commonly referred to as earned income.  Social Security, pension and interest income are not considered earned income for IRA contribution purposes, either.

The CARES Act payments are an early credit on a tax filer’s 2020 tax liability. The IRS will use the tax filer’s 2018 tax return to determine benefits, unless the individual or couple has already filed their 2019 Federal tax return. Individuals who are not dependents may receive up to $1,200 (i.e., single filers and heads of households); joint filers can receive up to $2,400; and there is an additional rebate of $500 per qualifying child, if they have adjusted gross income (AGI) under $75,000 (single), $150,000 (joint), or $112,500 (heads of household) using 2019 tax return information. The rebate phases out by $50 for every $1,000 of income earned above those thresholds.

If your client had some self-employment or even part-time wage income from actual service performed, then an IRA contribution based on such income would be feasible.

Conclusion

What can and cannot be used as eligible earned income to support an IRA contribution can be confusing. While CARES Act Recovery Rebates are welcome relief, they are not considered income for IRA contribution purposes.

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How is it possible to make a $27,000 IRA contribution by April 15, 2019?

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“A colleague of mine said a 60-year-old client couple of his just made a $27,000 IRA contribution. How is that possible without creating an excess contribution?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to IRA contributions.

Highlights of the Discussion

There is a window of opportunity from January 1 through April 15, 2019, for a married couple to be able to contribute up to $27,000 at one time to their IRAs. Sizeable contributions like this are possible each year during tax season because of the carry-back and current-year IRA contribution rules, combined with the catch-up contribution limits for those ages 50 or more.

Here’s how it breaks down. From January 1 to April 15, 2019, it is potentially possible for a traditional or Roth IRA owner age 50 and over to contribute $6,500 as a 2018 carry-back contribution, and $7,000 as a 2019 current year contribution, for a total of $13,500.[1] That means a married couple filing a joint tax return could potentially make combined IRA contributions totaling $27,000, with $13,500 going to each spouse’s respective IRA.

Please be aware of the caveats. Such a large contribution would only be possible if the couple

  • Had not previously made 2018 contributions to traditional or Roth IRAs;
  • Each spouse was age 50 or greater as of December 31, 2018;
  • The couple has earned income to support the contributions;
  • For a Roth IRA contribution, had modified adjusted gross income (MAGI) under the limits for Roth IRA contribution eligibility; and
  • For a traditional IRA contribution, was under age 70½. (Whether a couple’s traditional IRA contributions would be tax deductible depends upon the couple’s MAGI and participation in a retirement plan at work. Please see the applicable MAGI ranges below.
Roth IRA Contribution Eligibility 2018 and 2019
Taxpayer Category 2018 MAGI Phase-Out Ranges 2019 MAGI Phase-Out Ranges
Married filing jointly $189,000-$199,000 $193,000-$203,000
Single individuals $120,000-$135,000 $122,000-$137,000
Married filing separately $0-$10,000 $0-$10,000
Traditional IRA Eligibility for Deductible Contributions
Taxpayer Category 2018 MAGI Phase-Out Ranges 2019 MAGI Phase-Out Ranges
Married active participant filing jointly $101,000-$121,000 $103,000-$123,000
Single active participant $63,000-$73,000 $64,000-$74,000
Married active participant filing separately $0-$10,000 $0-$10,000
Spouse of an active participant $189,000-$199,000 $193,000-$203,000

When making IRA contributions during the period between January 1 and April 15th of a given year, it is important for an investor to clearly designate to the IRA trustee or custodian for what year a contribution is being made (e.g., what portion represents a carry-back contribution for the preceding year and what portion represents a current-year contribution) in order to avoid having the full amount treated as a current-year contribution and, subsequently, an excess contribution.

Conclusion

Because of the carry-back and current-year IRA contribution rules, there is a window of opportunity through April 15th that allows eligible investors to double up, seemingly, on IRA contributions. Investors interested in maximizing their contributions in this way should consult their tax advisors regarding their particular circumstances.

 

[1] For eligible individuals under age 50, the maximum IRA contribution limit is $5,500 for 2018 and $6,000 for 2019.

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Retirement Savings Tax Credit

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“What contributions are eligible for the retirement savings tax credit?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with an advisor in Oklahoma is representative of a common inquiry regarding available tax credits for retirement contributions.

Highlights of Discussion

IRA owners and retirement plan participants (including self-employed individuals) may qualify for a retirement savings contribution tax credit. Details of the credit appear in IRS Publication 590-A and here Saver’s Credit.

The credit

  • Equals an amount up to 50%, 20% or 10% of the taxpayer’s retirement plan or IRA contributions up to $2,000 ($4,000 if married filing jointly), depending on adjusted gross income (as reported on Form 1040, 1040A or 1040NR);
  • Relates to contributions taxpayers make to their traditional and/or Roth IRAs, or elective deferrals to a 401(k) or similar workplace retirement plan; and
  • Is claimed by a taxpayer on Form 8880, Credit for Qualified Retirement Savings Contributions.

Contributors can claim the Saver’s Credit for personal contributions (including voluntary after-tax contributions) made to

  • A traditional or Roth IRA;
  • 401(k),
  • Savings Incentive Match Plan for Employees (SIMPLE) IRA,
  • Salary Reduction Simplified Employee Pension (SARSEP) IRA,
  • 403(b) or
  • Governmental 457(b) plan.

In general, the contribution tax credit is available to individuals who

1) Are age 18 or older;

2) Not a full-time student;

3) Not claimed as a dependent on another person’s return; and

4) Have income below a certain level.

2018 Saver’s Credit Income Levels

Credit Rate Married Filing Jointly Head of Household All Other Filers*
50% of your contribution AGI not more than $38,000 AGI not more than $28,500 AGI not more than $19,000
20% of your contribution $38,001 – $41,000 $28,501 – $30,750 $19,001 – $20,500
10% of your contribution $41,001 – $63,000 $30,751 – $47,250 $20,501 – $31,500

*Single, married filing separately, or qualifying widow(er)

The IRS has a handy on-line “interview” that taxpayers may use to determine whether they are eligible for the credit.

Conclusion

Every deduction and tax credit counts these days. Many IRA owners and plan participants may be unaware of the retirement plan related tax credits for which they may qualify.

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Active Plan Participant and IRA Contributions

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“Active participation in an employer’s retirement plan can affect whether an IRA contribution made by the participant is deductible on the tax return. What does ‘active participation’ mean?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Minnesota is representative of a common inquiry involving a taxpayer’s ability to make a deductible IRA contribution. 

Highlights of Discussion

For purposes of the IRA deduction rules, an individual shall be an “active participant” for a taxable year if either the individual or the individual’s spouse actively participates during any part of the year in a(n)[1]

  • Qualified plan described in Internal Revenue Code Section [IRC §401(a)], such as a defined benefit, profit sharing, 401(k) or stock bonus plan;
  • Qualified annuity plan described in IRC §403(a);
  • Simplified employee pension (SEP) plan under IRC §408(k);
  • Savings incentive match plan for employees (SIMPLE) IRA under IRC §408(p);
  • Governmental plan established for its employees by the federal, state or local government, or by an agency or instrumentality thereof (other than a plan described in IRC §457);
  • IRC §403(b) plan, either annuity or custodial account; or
  • Trust created before June 25, 1959, as described in IRC §501(c)(18).

When an individual is considered active depends on the type of employer-sponsored plan.

Profit Sharing or Stock Bonus Plan:   During the participant’s taxable year, if he or she receives a contribution or forfeiture allocation, he or she is an active participant for the taxable year.

Voluntary or Mandatory Employee Contributions: During the participant’s taxable year, if he or she makes voluntary or mandatory employee contributions to a plan, he or she is an active participant for the taxable year.

Defined Benefit Plan: For the plan year ending with or within the individual’s taxable year, if an individual is not excluded under the eligibility provisions of the plan, he or she is an active participant for that taxable year.

Money Purchase Pension Plan: For the plan year ending with or within the individual’s taxable year, if the plan must allocate an employer contribution to an individual’s account he or she is an active participant for the taxable year.

Refer to IRS Notice 87-16 for specific examples of active participation.

As a quick check, Box 13 on an individual’s IRS Form W-2 should contain a check in the “Retirement plan” box if the person is an active participant for the taxable year.

 

Form W-2 Box 13 Retirement Plan Checkbox Decision Chart

Type of Plan Conditions Check Retirement Plan Box?
Defined benefit plan (for example, a traditional pension plan) Employee qualifies for employer funding into the plan, due to age/years of service—even though the employee may not be vested or ever collect benefits Yes
Defined contribution plan (for example, a 401(k) or 403(b) plan, a Roth 401(k) or 403(b) account, but not a 457 plan) Employee is eligible to contribute but does not elect to contribute any money in this tax year No
Defined contribution plan (for example, a 401(k) or 403(b) plan, a Roth 401(k) or 403(b) account, but not a 457 plan) Employee is eligible to contribute and elects to contribute money in this tax year Yes
Defined contribution plan (for example, a 401(k) or 403(b) plan, a Roth 401(k) or 403(b) account, but not a 457 plan) Employee is eligible to contribute but does not elect to contribute any money in this tax year, but the employer does contribute funds Yes
Defined contribution plan (for example, a 401(k) or 403(b) plan, a Roth 401(k) or 403(b) account, but not a 457 plan) Employee contributed in past years but not during the current tax year under report No (even if the account value grows due to gains in the investments)
Profit-sharing plan Plan includes a grace period after the close of the plan year when profit sharing can be added to the participant’s account Yes

 

If a person is an active participant, he or she must apply income thresholds to determine whether an IRA contribution is deductible or not. Please refer to the following chart

IRA Contribution Deductibility

 

Conclusion

Participating in certain employer-sponsored retirement plans can affect an individual’s ability to deduct a traditional IRA contribution on an individual’s tax return for the year. The IRS Form W-2 should indicate active participation in an employer-sponsored retirement plan. When in doubt, taxpayers should check with their employers.

 

 

[1]  IRS Notice 87-16

 

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Plan Participation and IRA Contributions

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 Plan Participation and IRA Contributions

“A client of mine who participates in a 401(k) plan at work was told by his tax preparer that he cannot make an IRA contribution.  Is that correct?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

  • If your client is under age 70 ½ and has earned income for the year of contribution, he is eligible to make a traditional IRA contribution, provided he does so by the contribution deadline.  But because he participates in a 401(k) plan, the contribution may not be fully tax deductible.
  • Deductibility of a traditional IRA contribution depends on whether the individual (or his or her spouse) is an active participant in an employer-sponsored plan, tax filing status and the amount of modified adjusted gross income (MAGI) for the year (IRC Sec. 219(g).

Deductibility of a 2016 traditional IRA contribution when the individual (or spouse) is covered by a workplace retirement plan

IF your filing
status is …		 AND your modified adjusted gross income (modified AGI)
is …		 THEN you can take …
single or
head of household		 $61,000 or less a full deduction.
more than $61,000
but less than $71,000*		 a partial deduction.
$71,000 or more no deduction.
married filing jointly or
qualifying widow(er)		 $98,000 or less a full deduction.
more than $98,000
but less than $118,000**		 a partial deduction.
$118,000 or more no deduction.
married filing separately2 less than $10,000 a partial deduction.
$10,000 or more no deduction.
Not covered by a plan, but married filing jointly with a spouse who is covered by a plan  $184,000 or less a full deduction.
more than $184,000
but less than $194,000***		 a partial deduction.
Source:  IRS 2016 IRA Contribution and Deduction Limits $194,000 or more no deduction.

*$62,000-$72,000 for 2017; **$99,000-$119,000 for 2017; and ***$186,000-$196,000 for 2017

 

Conclusion

If a person meets the age and income requirements for a year, he or she is eligible to make a traditional IRA contribution by the deadline.  But the tax deductibility of the contribution will be affected by participation in a workplace retirement plan, tax filing status and MAGI.

 

 

 

 

 

 

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