Who is an active participant?
Active participant status affects an individual’s eligibility to take a deduction for a contribution to a traditional IRA on his/her federal tax return.
Note: The IRS uses the phrase ” covered by a retirement plan’ in some of their publications. This means the same thing as ‘active participant’ for purposes of determining whether a contribution to a traditional IRA is deductible.
An individual is considered an active participant if he/she participates in any of the following types of plans for the year.
- A qualified plan, such as a defined benefit plan, money purchase pension plan, target benefit plan, profit-sharing plan, a 401(k) plan, or stock bonus plan
- A 403(a) or qualified annuity plan
- A 403(b) or tax-sheltered annuity plan
- A SEP IRA
- A SIMPLE IRA
- A trust described under IRC § 501(c)(18) or
- A plan established for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of any of the foregoing
The following formula is used to calculate the deductible IRA contribution amount, for an active participant
(Highest dollar limit of MAGI range – MAGI) x(Contribution limit/{Highest dollar limit of MAGI range– Lowest dollar limit of MAGI range})
Additional Helpful Information Related to Active Participants
- Individuals who are active participants are eligible to deduct their traditional IRA contributions, only if their MAGI amounts do not exceed certain limits. The MAGI that applies to each tax-filing status is as follows:
The MAGI limits that apply to each tax-filing status are as follows:
| 2024 MAGI limits for deducting contributions to Traditional IRAs | ||
| Tax Filing Status | MAGI | Allowed deduction |
| a. Single individuals and heads of household who are active participants in a qualified plan/employer plan | $77,000 or less | 100% |
| $77,000 to $87,000 | Partial | |
| $87,000 or more | None | |
| b. Married couples filing jointly if the spouse who makes the IRA contribution is an active participant | $123,000 or less | 100% |
| $123,000 to $143,000 | Partial | |
| $143,000 or more | None | |
| c. IRA contributor who is not an active participant and is married to someone who is an active participant, | $230,000 or less | 100% |
| $230,000 to $240,000 | Partial | |
| $240,000 or more | None | |
| d. a married individual filing a separate return who is an active participant | Less than $10,000 | Partial |
| $10,000 or more | None | |
- The final determination of whether the individual is an active participant depends on the type of retirement plan in which the individual participates or receives benefits, and the year the contribution was made to the plan or the year the benefits were received. For instance:
|
Type of Plan |
Determination of Active Participant Status |
| SEP IRA&Profit Sharing Plan |
The individual is an active participant for the year the contribution is deposited to the individual’s account. For instance, if the contribution is for last year and deposited last year, then the individual is an active participant for last year. However, if the contribution is for last year, but deposited to the individual’s account this year, then the individual is an active participant for this year
|
| Money Purchase and Target Benefit Plans |
The individual is an active participant for the year for which a forfeiture is allocated, or the contribution is made regardless of when it is deposited to the individual’s account. For instance, if the contribution is for last year and deposited last year, then the individual is an active participant for last year. And if the contribution is for last year, but deposited to the individual’s account this year, then the individual is an active participant for last year
|
| Defined Benefit Plan |
The individual is an active participant if he/she is not excluded under the eligibility provisions of the plan for the plan year ending with or within the individual’s taxable year ,regardless of whether the individual has elected to decline participation in the plan, has failed to make a mandatory contribution specified under the plan or has failed to perform the minimum service required to accrue a benefit under the plan.
|
| 401(k), 403(b), Salary deferral SEP, SIMPLE IRA |
The individual is an active participant if the individual elects to defer compensation (make salary deferral contributions) to the to a plan If the individual is eligible to make salary deferral contributions, but declines to make such salary deferral contributions for a year, and no other contributions or forfeitures are allocated to such individual’s account for the plan year ending with or within the individual’s taxable year, the individual is not an active participant for that year.
|
- If an individual is not an active participant, nor married to someone who is an active participant, contributions made to the individual’s traditional IRA is fully deductible. If an individual is an active participant, or married to someone who is an active participant, the individual’s ability to deduct his/her traditional IRA contribution is determined by his/her modified adjusted gross income (MAGI).
- Contributions to a Roth IRA are not affected by an individual’s active participant status, as Roth IRA contributions are nondeductible
Rulings on Active Participant Status
- TC Memo 2001-114: Individual was determined to be an active participant, despite limited participation in plan. Deduction for IRA contribution was denied
- T.C. Summary Opinion 2007-13: Individual was determined to be an active participant, despite limited participation in plan. Deduction for IRA contribution was denied
