Active participation
I have two different scenarios.
1) One client fully funds his SEP IRA and his wife is retired with a pension. Their AGI is expected to be $ 150,000, which is over the limit for a deduction. However, the limit for deductions for a non-active participant is 204-214K. With his wife retired, does she fall into the category of being an active participant or a non-active participant?
2) I have a client who will become eligible to contribute to a 401k in December. Where she only has 2 pay periods to contribute, does that automatically disqualify her for a deductible IRA? Her AGI is $ 90,000, which is over the limit. I didn’t know if it’s cut and dry that if you are a participant for even one day of 2022, you are an active participant. Does the IRS offer any latitude with this or is all or none?
Permalink Submitted by David Mertz on Wed, 2022-10-26 13:32
Permalink Submitted by Robert Roselli on Wed, 2022-10-26 14:07
For client #2, if they simply elect to not contribute to the plan (regardless of whether the plan uses fiscal or calendar year), will that make them a non-active participant? My understanding has always been if you have the ability to contribute to a 401k. you are an active participant whether you choose to or not, Is that incorrect?
Permalink Submitted by Alan - IRA critic on Wed, 2022-10-26 15:01
They would not be an active participant if no contributions were made to the plan for the plan year, but some plans may receive employer profit sharing contributions even if the participant did not contribute. In addition, while no employee contributions are made to a DB plan, if they are accruing benefits under a DB plan, the retirement box on the W-2 should be checked. Again, if the participant chooses not to make 401k contributions they are not an active participant as long as no employer contributions are made to their account for the plan year.
Permalink Submitted by Robert Roselli on Wed, 2022-10-26 15:09
I really appreciate that. It’s not always easy to get an answer by reading articles online. They tend to be very general in nature and do not get into the weeds.