Your eligibility to claim a deduction for your Traditional IRA contribution on your federal tax return depends on whether you are an active participant of an employer-sponsored plan in the year to which your deduction applies. If neither you nor your spouse is an active participant, you may deduct your full contribution for the year, up to the contribution limit. If, however, you are an active participant, your tax-filing status and modified adjusted gross income (MAGI) determine your eligibility to deduct your IRA contribution. Here we take a look at how to determine your active-participant status, which can be tricky as the rules vary for each type of employer-sponsored retirement plan. (see Traditional IRAs: Contributions .)
If you are an active participant, your employer should indicate as such on your Form W-2 by checking the "retirement" box. However, administrative errors can happen, so this box is sometimes not checked even when it should be. It's helpful for you to understand the rules, so that you don't have to rely on your employer's reports to determine whether you are considered an active participant for a tax year.
Determining Active Status
The rules regarding active-participant status are different for different types of employer retirement plans. (For more, read 10 Most Overlooked Tax Deductions .)
If you are
eligible to participate in a defined-benefit plan for the tax year, you are considered an active participant for that year. This is so even if you decline to participate in the plan, fail to make mandatory contributions to the plan or fail to perform the minimum service required to accrue a benefit under the plan for the year.
Money-Purchase Pension and Target-Benefit Plan
For money-purchase pension and target-benefit plans. you are considered an active participant for the year to which your contributions to these plans apply. This is so, regardless of when your contribution is actually deposited to your account.
For example, say your employer sponsors a money-purchase pension plan, and is required to contribute 10% of eligible compensation to the plan each year. Your employer has until its tax-filing deadline, including extensions, to deposit a particular year's contributions. So, if a 2012 contribution was made in 2013, you are considered an active participant for the 2012 tax year, the year to which the contribution applies.
To demonstrate, let's say your employer sponsors a profit-sharing plan, to which it contributes 10% of eligible compensation for the 2012 tax year. But the contributions are deposited in 2013. Employees are considered active participants for 2013, the year in which the contributions are actually deposited to their accounts.
401(k) and 403(b) Plans