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simple IRA contribution timing requirements


Guest Ed Walker
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Guest Ed Walker

Sole Proprietor Personal tax return is due on extention at 8/15 Simple IRA has not been fully funded. Goal $6000 plus 3% of Schedule C income.

CPA, pointing primiarly to page 9 of Pub 550, agrees the 3% can be contributed up until 8/15 but questions that the $6,000 can be contributed after 01/31/00 (more than 30 days after the end of the year.)

I thought all contributions by a sole proprietor, with no employees, could be to made to a Simple IRA up to the due date of the tax return.

I think example 2 ("When to Deduct Contributions") on page 9 of pub 560 supports this.

Who is right? Thanks

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I am fairly certain the CPA is correct. The example you rely on merely states a general of deductibility; it does not supercede time limitations for making elective deferral contributions. The rules clearly state that salary reduction contributions must be made within 30 days after the end of the month for which the amounts would have been payable. Generally compensation of a self-employed individual is deemed available as of the last day of the tax year.

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  • 1 month later...

While earned income is deemed earned on the last day of the fiscal year, it is possible that it is not determined until a latter date. Thus, the elective amount, in the case of a self-employed individual, may be contributed after the end of the year (see following discussion which should apply equally to all types of SIMPLE plans).

When the plan asset regulations were proposed, two comments were received by the DOL relating to when contributions by partners become plan assets. Those letters asserted that a partner's compensation is deemed currently available on the last day of the taxable year and that an individual partner must make an election by the last day of the year. In the view of the DOL, under the final regulations, the monies that are to go to a qualified 401(k) plan by virtue of a partner's election become plan assets at the earliest date they can reasonably be segregated from the partnership's general assets after those monies would otherwise have been distributed to the partner, but no later than 15 business days after the month in which those monies would, but for the election, have been distributed to the partner. [Emphasis added] [Preamble, ERISA § 2510.3-102]

It is unclear to what extent a sole proprietor could rely on those regulations. The following example explains how this rule might apply in a typical situation.

Example. The Able-7 Partnership maintains a SARSEP. On December 31, 1999, the last day of its taxable and plan year, all the partners individually elect to defer the maximum amount into their SARSEP-IRAs (not to exceed $10,000 per person). During the year, each partner had a monthly draw of $2,000 cash against eventual earnings. The firm's accountant is ill and will not be able to compute Able-7's net earnings by the due date of Able-7's return and therefore files for an extension of behalf of the partnership and each of the partners. On June 27, the partnership is notified by its accountant that it indeed had a profit and that each of the partners is due an additional $37,000. Able-7 must deposit $70,000 as contributions to the SARSEP-IRAs of its seven partners as soon as the amounts can reasonably be segregated from the partnership's general assets, but no later than 15 business days after the end of the month of June. For deduction purposes, the amounts must be deposited by July 17, 2000, the extended due date of Able-7's 1999 return.

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