SEP and traditional IRA

Technical topics regarding tax preparation.
#1
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Client, a husband and wife, is on extension for 2021. The husband has a Schedule C that employs his wife, and she got a W-2 for 2021. Both contributed to the maximum amount to their traditional IRAs during 2021 for 2021.

Husband would like to set up a SEP for 2021 and contribute to it for he and his wife by October 17, 2022. If they do so, the issue is whether they would be deemed part of a employer retirement plan for 2021. If so, that would serve to disallow an IRA deduction for the amounts they contributed already to 2021.

If memory serves me, there was a discussion about the timing and you are not considered to be part of a plan for 2021 if no contribution is made during calendar even though the plan year (2021) has a contribution credited to you. In other words, they could have a deductible IRA and a SEP deduction for 2021.

Is my understanding correct?
 

#2
Anderly  
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You are correct:

Reg 1.219-2(d)

(d) Profit-sharing and stock-bonus plans -

(1) In general. This paragraph applies to profit-sharing and stock bonus plans. An individual is an active participant in such plans in a taxable year if a forfeiture is allocated to his account as of a date in such taxable year. An individual is also an active participant in a taxable year in such plans if an employer contribution is added to the participant's account in such taxable year. A contribution is added to a participant's account as of the later of the following two dates: the date the contribution is made or the date as of which it is allocated. Thus, if a contribution is made in an individual's taxable year 2 and allocated as of a date in individual's taxable year 1, the later of the relevant dates is the date the contribution is made. Consequently, the individual is an active participant in year 2 but not in year 1 as a result of that contribution.
 

#3
JR1  
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Wow. My head explodes over that. I'd have bet someone's farm that that couldn't be.
Go Blackhawks! Go Pack Go!
Remembering our son, Ben Jan 22, 1992 to Aug 26, 2011.
For FB'ers: https://www.facebook.com/groups/BenRoberts/
 

#4
MilesR  
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What an interesting rule. So I guess that means they couldn't do a deductible traditional ira contribution for 2022 since this SEP contribution would mean they were an active member in a plan during 2022?
 

#5
Anderly  
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Yes, I have to look it up every time because it seem so "wrong"
 

#6
MilesR  
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Slightly related question: I was just looking at section 408(k)(2) for SEPs and it says you have to contribute to each employee who has worked for the employer for at least 3 out of the last 5 years.

I have always heard that if a self-employed person makes a SEP contribution that they also have to do it for all the employees. But this sounds like you actually don't have to contribute for the employee unless they've worked for you for at least 3 years.

Am I reading this right? I recently had a new s-corp client who just hired employees for his existing business and wanted to continue doing a SEP but I told him he had to contribute for the employees as well..... It ended up okay because he started a SIMPLE and contributed that way instead, but it sounds like he really could have continued with the SEP for a couple more years.
 

#7
sjrcpa  
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Maryland
The 3 out of 5 years applies to the owner, too.
This is the default "setting" in the 5305-SEP. Employer can choose more liberal eligibility.
 


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