Active Participation preventing deduction of IRA contribution
I have a Schedule C sole proprietorship that has a Keogh profit sharing plan. In 2024 I had an employee for the first time that qualified for profit sharing coverage so I elected to not have my business contribute to my plan for the 2024 plan year for either my employee or myself.
For 2023, I did not have an employee in 2023 so I had my business make contributions to my self employed profit sharing plan covering me for the 2023 plan year. My businesses contributions for the 2023 plan year were primarily done during 2023 but were partially funded/completed in January of 2024 prior to the filing of my 2023 tax return.
My question is whether or not the Keogh contributions that were made to my profit sharing plan by my business in January of 2024 for the 2023 plan year make me an active profit sharing plan participant during 2024 that would disqualify me from deducting a 2024 IRA contribution?
Permalink Submitted by Alan - IRA critic on Sun, 2025-03-23 22:59
The 2024 Keogh contribution for 2023 should not make you an active participant in 2024 if you did not make any 2024 contributions. This is due to the following special exception to the active participation rules in Sec 219 quoted below.
‘”Special rule. An individual is not an active participant for a particular taxable year by reason of a contribution made in such year allocated to a previous year if such individual was an active participant in such previous year by reason of a prior contribution that was allocated as of a date in such previous year.”
Permalink Submitted by William Waltermire on Mon, 2025-03-24 18:50
Thank you Alan
Subtle variation to the question.
What if I resume making Keogh contributions in 2025 for the 2025 tax year and I don’t make my IRA contribution for the 2024 year until March of 2025 (prior to the 4/15/2025 filing deadline for my 2024 tax return)?
I’m clearly an active participant in my Keogh plan for the 2025 tax/calendar year but does my active Keogh retirement plan participation during 2025 cause my designated 2024 IRA contribution to be nondeductible since it wasn’t made until early 2025?
i.e
2024 has no active participation
2025 has active participation
2024 IRA contribution made in early 2025, designated to 2024 tax year.
Is IRA contribution deductible or not deductible on my 2024 personal tax return?
Permalink Submitted by Alan - IRA critic on Mon, 2025-03-24 19:00
You would be an active participant in 2025. That does not affect your 2024 IRA contributions whether you made them in 2024 or 2025. You could deduct the 2024 TIRA contribution.
But remember, if you are married and spouse is an active participant there is a (higher) income limit over which you would not qualify for the deduction.