IRA contr and 401(k)

[Guest Brenda Schachle]

Owner of company is terminating his 401(k). Calendar year 401(k) terminating in mid-2003. He wants to know if he can make a deductible IRA contribution for 2003. I suspect no since he was eligible for a 401(k) during part of the year (even though participation was poor and he was unable to make any significant contribution due to ADP test). Any thoughts? Any ideas?

[mbozek]

Its not eligibility but whether he was an active participant, e.g, any contribution or forfeiture is contributed to his 401(k) account for 2003. See IRS pub 590, P13.

[Guest Brenda Schachle]

Yes he was eligible and yes he was active -- the big deal is he DID NOT make any 401(k) contribution in 2003 but my concern is, because he was eligible, he was "deemed benefitting" and may therefore be considered ineligible for a deductible IRA contribution. Is this a legitimate concern or should he make the deductible IRA contribution and move on?

[mbozek]

The answer is in the cite to pub 590 P13, col 2.

[Guest Brenda Schachle]

ok. I read Pub 590, page 13 col 2. no where is 401(k) mentioned. In fact, it says, types of DC plans "include profit-sharing plans, stock bonus plans, and money purchase pension plans." (We all know 401(k) is a PSP). As I said and I assume you know, if you are eligible for a 401(k) plan you are "deemed benefitting" and therefore counted on the 5500 as a participant whether or not you participated (made a salary deferral or received ER contr). This participant made no contribution in 2003 and will receive no employer contribution in 2003 but I think he is not eligible for a deductible IRA because he was "deemed benefitting under the now terminated 401(k) plan. On the other hand, the 5500 for 2003 will show no participants at year end because the assets will be distributed. So, what do you think? If your answer is it depends on whether the box is marked on his W-2 - That is part of the Question! How many CPA's have you seen get that right?

[Lynn Campbell]

Whether he is deemed benefitting is not the issue. If he gets zero dollars allocated to his account from contributions, and zero dollars from forfeitures, he is not an "active participant" for purposes of the IRA deduction rules. Thus he can take the deduction.

[Blinky the 3-eyed Fish]

Lynn is correct. Although, keep in mind for a 401(k) plan, it's the date of the allocation, not the year in which the allocation is made. So, if there was a 2002 profit sharing contribution not deposited until 2003, then you have yourself an active participant for 2003.

[Guest Brenda Schachle]

no contribution or receivable -- thanks, folks.