Advanced Underwriting Consultants

Question of the Day – December 28

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: The IRS limits the ability of taxpayers who are active participants in employer-sponsored pension plans to make deductible IRA contributions.  What is an active participant?

Answer: In 2012, a 45 year old single person with $100,000 of earned income who is not an active participant in an employer-sponsored pension plan may make a $5,000 deductible contribution to a traditional IRA.  The same person, if an active participant, may NOT make a deductible contribution to a traditional IRA.

So who is an active participant?  The definition depends on the type of pension plan that is available to the taxpayer:

  • If the taxpayer is eligible to participate in a 401K or 403b plan, but makes no employee salary-deferred contributions to the plan in a calendar year, the taxpayer is not an active participant.
  • If the taxpayer is eligible to participate in a defined benefit pension plan, the taxpayer is always an active participant.
  • If the employer makes a contribution on the taxpayer’s behalf into a target benefit or money purchase plan for the tax year in question, the taxpayer is an active participant for that year.
  • If the taxpayer is eligible to participant in a SEP IRA or profit sharing plan, but the employer makes no contributions to the plan for a given tax year, the taxpayer is not an active participant for that year.

Taxpayers who are ineligible to make deductible IRA contributions may be eligible for contributions to a nondeductible IRA or a Roth IRA.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.