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

“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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Relief for delinquent Form 5500-EZ filers

“I have several clients who run owner-only businesses that have 401(k) plans that cover themselves and their spouses. I believe at least some of them should have been filing Form 5500-EZ, Annual Return of a One-Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan, but have not. Is there a way for them to correct this error without penalty?”

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 Colorado is representative of a common inquiry related to plan reporting requirements.

Highlights of the Discussion

An owner-only business with a qualified retirement plan that covers the owner, partners and spouses, such as a “solo (k)” or “individual (k),” must begin filing an annual Form 5500-EZ when the total value of the plan assets exceeds $250,000 at the end of the plan year. Regardless of plan asset value, an owner-only business must file a Form 5500-EZ to report the final plan year of the plan (See the Instructions for Form 5500-EZ.)

Initially, the IRS did not provide any penalty relief for delinquent Form 5500-EZ filers. That changed with the IRS’s release of Revenue Procedure 2015-32, which made permanent a 2014 pilot program that allowed owner-only businesses to correct late Form 5500-EZ filings. Without the program, a plan sponsor faces late filing penalties of $25 per day, up to $15,000 for each late Form 5500-EZ, plus interest, and $1,000 for each late actuarial report (for a defined benefit plan, if needed).

The IRS’s Form 5500-EZ Later Filer program is separate from the Department of Labor’s Voluntary Fiduciary Correction Program (VFCP), which is available to late filers of Forms 5500, Annual Return/Report of Employee Benefit Plan. Form 5500-EZ filers do not qualify for the VFCP.

In order for late filers of Form 5500-EZ to qualify for penalty relief, the business owner must meet the following criteria. He or she

  1. Has not been informed of a late filing penalty (i.e., the business owner has not received a CP 283 Notice from the IRS);
  2. Submits all delinquent returns for a single plan together;
  3. Prepares a paper Form 5500-EZ for each delinquent year, including any required schedules and attachments, if any. Use the Form 5500-EZ return that applied for the delinquent plan year. However, if the return is delinquent for a year prior to 1990, use the Form 5500-EZ for the current year (see prior year Forms 5500-EZ);
  4. Writes in red letters at the top of each paper return: “Delinquent Return Filed under Rev. Proc. 2015-32, Eligible for Penalty Relief;”
  5. Attaches a completed one-page transmittal schedule (Form 14704) to the front of each late return;
  6. Pays the required fee. The fee is $500 per delinquent return, up to $1,500 per plan. Make checks payable to “United States Treasury;” and
  7. Mails the returns to the following address (Note: Electronically filed delinquent returns are not eligible for penalty relief).

First class mail

Internal Revenue Service

1973 North Rulon White Blvd.

Ogden, UT 84404-0020

Private delivery services

Internal Revenue Submission Processing Center

1973 North Rulon White Blvd.

Ogden, UT 84404

Conclusion

Some owner-only businesses with qualified retirement plans must file an annual Form 5500-EZ. If they fail to do so when required, IRS penalties could result. Since 2015 there has been a permanent penalty relief program for Form 5500-EZ late filers to follow in Revenue Procedure 2015-32.

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