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.
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