TT asks if I am "covered by a retirement plan at work". What precisely is meant by "covered ..."?

[BillM223]

Even though an IRA is owned by an individual, the limit and deductibility for the IRA contribution depends on whether your OR your spouse if covered by a retirement plan at work.

If I remember the questions you are referring to, the first question will be for your husband (is he covered by a retirement plan at work), to which you can answer "No". The second question asks if you (the spouse) is covered by a retirement plan at work, to which you answer "Yes" (assuming that you are covered).

Please see this IRS webpage for more information.

[rchead037]

So, if I'm retired from an employer (and collecting my pension), but did NOT work for them in 2022, I should click "Not covered". It would help if the instructions were clearer for those who retired (but still have earned income elsewhere).

[DMarkM1]

Correct.  To be covered by that employer's plan you had to have worked for the employer in 2022.  

You’re covered by an employer retirement plan for a tax year if your employer (or your spouse’s employer) has a:

• Defined contribution plan (profit-sharing, 401(k), stock bonus and money purchase pension plan) and any contributions or forfeitures were allocated to your account for the plan year ending with or within the tax year;
   
• IRA-based plan (SEP, SARSEP or SIMPLE IRA plan) and you had an amount contributed to your IRA for the plan year that ends with or within the tax year; or
   
• Defined benefit plan (pension plan that pays a retirement benefit spelled out in the plan) and you are eligible to participate for the plan year ending with or within the tax year.

[rchead037]

Much appreciated!

And what about if I'm self-employed and make a SEP contribution? The traditional IRA amount that TT proposes is about 3x what it says is the maximum SEP contribution I can make.

But is seems to be a Spanish barber problem (In a small village, the barber shaves every man who does not shave himself... who shaves the barber?)

If I, as my own employer, make a SEP contribution on my behalf, am I then employed by an "employer" and therefore can't make a contribution?

Ah, tax law!

[RobertB4444]

Whether you count yourself as an employer or employee the company that you own can contribute to a SEP on your behalf.  Although if you can contribute three times as much to a traditional IRA maybe you should do that.

@rchead037 

[rchead037]

Thanks!

Though the language that was quoted earlier from the IRS suggests that if one is "eligible" for an employer retirement plan, that prevents the making of a personal IRA contribution... It's not a big deal, but this just shows how hard it is to be precise about all this!

[rchead037]

CORRECTION:

No personal IRA if you are "eligible to participate for [a defined benefit] plan year ending with or within the tax year.:

But for a SEP, SIMPLE, SARSEP, or DC plan, an amount has to be allocated/contributed. 

So it looks like I can contribute to my personal IRA _instead_ of my SEP... but not both.

Turbo-Tax, so far, is letting me contribute to both, and the chances of the IRA ever noticing are pretty small, I'd say... but best to play it safe, and best to be legal where it's clear what legal is.

[goodoletaxes]

Seen this posted a lot and it’s fairly easy to find on the IRS site:

• Defined benefit plan (pension plan that pays a retirement benefit spelled out in the plan) and you are eligible to participate for the plan year ending with or within the tax year.

What is the definition of eligible to participate?

My situation is:

I work for a municipality. They contribute to a state run defined benefit pension plan; TN Consolidated Retirement System.

I have no option to contribute anything.

The employer contributes everything and it is not considered income for us. It is a benefit they provide. 

For 17 years our W2s have had Box 13 Retirement Plan NOT CHECKED. 

I had even inquired with HR before about why this was. They told me since we did not have any option to contribute to the pension plan and the employer funds it completely, we were not considered eligible to participate. 

So my main question here is:

what makes a person eligible to participate in a defined benefit plan?

And if anyone has any further insight into my situation, I’d love to hear it. 

Thanks 

[GeorgeM777]

It appears you are eligible by the fact that you are covered by the Tennessee Consolidated Retirement System.  It is not clear why your employer did not check box 13 on your W-2 as they probably should have.  The TCRS is a defined benefit plan and according to the IRS you are eligible to participate in such plan whether you were enrolled or not.  IRS Publication 590-A provides the following information about defined benefit plans and eligibility:

Defined benefit plan. If you are eligible to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are covered by the plan. This rule applies even if you:

• Declined to participate in the plan,  
• Didn’t make a required contribution, or 
• Didn’t perform the minimum service required to accrue a benefit for the year. 

A defined benefit plan is any plan that isn’t a defined contribution plan. In a defined benefit plan, the level of benefits to be provided to each participant is spelled out in the plan. The plan administrator figures the amount needed to provide those benefits and those amounts are contributed to the plan. Defined benefit plans include pension plans and annuity plans.

Thus, you are eligible by virtue of the fact that you are an employee of a Tennessee municipality that offers a defined benefit plan.  It does not appear that you have the option to decline to participate.  However, even if you could decline to participate, you would still be considered eligible according to IRS Publication 590-A.

@goodoletaxes