Traditional IRA

Archive for the ‘Traditional IRA’ Category

Who Is Considered Covered by an Employer Retirement Plan?

Traditional IRA contributions are not deductible for an employee that is covered (also referred to as being an active participant) by an employer retirement plan where the contributor’s income is above the allowable AGI threshold.

An individual is considered to be covered by an employer retirement plan, if, for any part of the plan year ending within the tax year (December 31), funds are contributed by the employee or the employer on behalf of the employee to a retirement plan, 401k, 403b, or other employer sponsored retirement plans.

An actual physical 401k contribution by the employee or employer is not required; a mere accrual of benefit under a defined benefit plan would constitute plan coverage.

A individual is considered covered by an employer retirement plan for the entire year even if he/she was an active participant in the plan for only one day.

How to find out if you are covered by an employer retirement plan, 401k, or 403b.

If the employee is unsure whether plan coverage exists, the simplest way to determine whether an individual is covered by an employer retirement plan is to look at the “retirement plan box” on the client’s W-2 (look at box 13). The W-2 is received by January 31 and summarizes the previous year’s earnings from that employer.

If the pension plan box is marked with an “X” then that individual is reported to the IRS as being “covered” by some type of a retirement plan.

Anyone who is unsure whether or not you are covered should check with their employer.

What is an employer retirement plan?

An employer retirement plan is one that an employer sets up for the benefit of its employees. The most common type of retirement plans are 401h, 403b, pension, profit sharing, money purchase plan, SEP IRA and SIMPLE IRA plans.

457 plans are not qualified retirement plans for this purpose.

When does a self employed person covered by an employer retirement plan?

Self-employed persons are considered to be covered by a pension plan if they contributed a SEP IRA, SIMPLE IRA, money purchase plan, profit sharing plan, pension plan, or 401k.