Hi,
I’m a sole proprietor. I just established a SEP IRA and I plan to make a contribution soon (in calendar year 2011) and deduct it on my 2010 tax return. I have never had a business retirement plan before, so there also were no contributions made in 2010 for 2010 or 2009. I also would like to make a fully-deductible traditional IRA contribution soon (in 2011) for deduction on my 2010 taxes. I had assumed that the deductibility of this traditional IRA contribution would be a dependent on my MAGI …. because I assumed that my making a SEP contribution FOR tax year 2010 in 2011 meant that I would be covered by a retirement plan for 2010 and therefore I’d have to use the income phaseout tables when determining if traditional IRA contribution FOR tax year 2010 in 2011 would be deductible.

However, I came across the following which really surprised me. I think it says that because I am making my SEP IRA contribution FOR 2010 in 2011 instead of 2010 (and because I didn’t have a retirement plan in previous years), my traditional IRA contribution for 2010 will be fully deductible REGARDLESS OF INCOME. My income is approx. $200K so this directly applies to me. Here’s the other message board item. I’d appreciate your comment about it. Perhaps I am misinterpreting something. Thanks!

PS Please also note it is dated 2004. She refers to “active participant”. The current tax forms use the term “were covered by a retirement plan” …. not sure if things have changed from 2004-present or if the difference in terms matters. Also I think the other article might refer to an employee vs. an employer … not sure … and not sure if it matters. She also states that this rule applies to plans whose contributions are discretionary …. I know the new SEPs (unlike SARSEPS) are not discretionary … but I don’t know if that matters etiher. I also know that Fidelity doesn’t code “current year” or “prior year” for SEP contributions (unlike traditional IRA contributions where they do), so maybe the article is right about the SEP. Seem like a loophole to me, but I’d love to take advantage of it if this is accurate.

“Appleby Apr 7 2004, 03:41 PM
For SEP IRAs, you are considered an active participant for the (your) taxable year that the contribution is deposited to your SEP IRA. Therefore, if the employer deposits your SEP contribution for 2003 during 2004, you are not considered active for 2003. Consequently, the contribution would affect your ability to deduct your 2004 IRA contribution…and the company would not be required to issue a corrected W-2. This rule applies to plans for which contributions are discretionary”
http://benefitslink.com/boards/lofiversion/index.php/t24038.html