401k
401k Information

401k Contribution Deadline

An IRA retirement account is one of the critical pieces of planning for retirement. Millions of Americans have an IRA account that they contribute to. If you are eligible for an IRA account, contributions should be made consistently, each and every year. This is the best way to financially plan for your retirement. To take advantage of all the benefits associated with an IRA, there are some common mistakes that should be avoided. The following will discuss 4 of the 9 most common mistakes that are made.

IRA Mistake #1: Not Naming a Beneficiary

Upon opening an IRA, you are not required to name anyone as a beneficiary to the account. Even though this action is not required, it is highly recommended. If something happens to you and there is no beneficiary named for the account, it will end up in probate. This will be a long, drawn out process that will cost money that didn’t need to be spent. The money in the account will be disbursed over the remaining life expectancy of the deceased account holder. This is usually a shorter amount of time than the expectancy of a beneficiary. In short, this means that money will be disbursed faster which will place a very heavy tax burden on the person who is receiving the money, which is determined in probate.

Naming a beneficiary when you open the IRA account will eliminate this. You will then be absolutely sure where your remaining IRA account will go after your death. You can also determine how fast the funds will be distributed.

IRA Mistake #2: Forgetting the Deadline for IRA and Roth IRA Contributions

Don’t forget the core purpose of Roth IRA’s – to fund it as much as possible for retirement! Many people believe that the last day they can make a contribution is on December 31, of the last day of the year. This is not true! You may continue to contribute up to April 15 of the following year. IRA contributions are based on the tax year – not the calendar year, so don’t miss this extra time by assuming the end of the year means the end of contributions.

The best way to avoid this common mistake is to fund as much as you can early in the year. If you meet the maximum simple IRA contribution limit or Roth IRA contribution limit, you will not miss out on saving more money. The date of April 15 is referred to as an extended contribution deadline. These few extra months could make a huge difference for most savers in your IRA retirement account.

IRA Mistake #3: Not Knowing Spousal/Non-Spousal Inheritance Rules

There is a difference in the rules of inheritance that applies to spousal and non-spousal beneficiaries. If you are a spousal beneficiary, you have two options. You may roll the funds into an IRA that is already in your name, or you may change the name on the inherited account. After this is complete, the money will be viewed as if it were yours all along. Contribution and withdrawal rules will apply as if it were your own account.

Non-spousal inheritances work differently. You will not be able to roll the funds over to your personal IRA. You are also not allowed to make any contributions to the original IRA account.

IRA Mistake #4: Not Contributing Because of Stock Market Volatility

Due to the recent stock market meltdown, many people are questioning whether they should continue contributing to their IRAs. The answer is simple. Never stop contributing! Regardless of what the market is doing at any given time, you should take full advantage of the numerous benefits offered by an IRA retirement account. One of those benefits is a tax break. No matter what the state of the market is, you will continue to get tax breaks on all money contributed. If you are lucky enough to work for a company that will match your contribution, you make even more money with the account, as well as with the added tax breaks which will of course lead to IRA retirement income when it is time to spend it.

Frequently Asked Questions

  1. QUESTION:
    Year End Deadline for Participant Contribution to Company Sponsored 401k Plan?
    For tax purposes, what is the deadline for a year end participant contribution to be deposited in a company 401k plan?

    Also, what determines the date that a 401k contribution made by the participant and deducted from my bonus check was “effective” for tax purposes? Is it:

    1. 12/28/06 which is the date that the bonus check was issued (net of the 401k contribution I requested to be made),

    2. 1/3/07 which is the date when my employer actually wrote the check to make the contribution, or

    3. Some other date?

    • ANSWER:
      The 401K contribution will reduce box 1 of your 2006 W-2. It is a 2006 contribution since it was withheld from your 2006 income.
      Your employer actually has until the 15th business day of January 2007 to make the deposit into your 401K investment account.

  2. QUESTION:
    What is the 2005 deadline for 401k paycheck contributions?

    • ANSWER:
      It really depends. There are a lot of factors that you could be affected by. If you are simply making 401(k) contributions from your paycheck and your employer is depositing the funds for you–then you have until 12/31/05. The date of 401(k) contributions as well as paid wages are based on check date. They are not based on pay period dates. So, let’s say you have wages you are earning between 12/18/05 and 12/31/05. The wages and 401(k) contribution for that time frame will be considered in 2006 if you are paid for those wages in 2006.

      The contribution may be deposited by the employer’s tax filing deadline, including extensions, for profit sharing.

      For salary deferrals, it follows a different rule. For instance if the business is incorporated, the salary deferral would be made from the individual’s W-2 wages and must be deposited by the 15th of the month following the month that the deferral was withheld from salary. If the business is a sole proprietorship, the salary deferral amount can be deposited when the employer files the annual tax return.

      I hope this answers your question. Depending on the situation, it can get rather confusing.

  3. QUESTION:
    what are the penalties against employers that dont contribute employee 401k contributions on time?
    I recently asked a question if the employer could use employee 401k contributions to pay business expenses. I did receive great answers as to knowing my rights. After further investigating at websites about 401k contributions, there is deadline of 15 business days to put the money in from the employee contribution. It also says that the employer can’t do that just for the conveinence of having the extra 15 days. My question is what are the penalties against the employer for not having the money put in on time even after the 15 business days? On January 17th there was a contribution in my account which was for the entire month of November. As of Today they still dont have December’s contribution in my account. Where can i find information about penalties against employers on the 401k account? I visited www.psca.org for the info on how soon the money should be put in. It was under the FAQ’S I will be bringing this to their attention as I get more facts. Thank you

    • ANSWER:
      This is what is called a prohibited transaction. Essentially they have taken a loan (that they are not allowed to do) from the plan and in order to correct it they have to go through the PWBA’s VFC program.

      To correct they have to make the deposits, add the interest, and if necessary pay the excise tax. If they do that then they will obtain VFC approval of the correction and life goes on. Failure to do that can result in additional excise taxes.

      They’ve already made the deposits so the next step is the interest…they may owe additional interest to your account. They will owe you the greater of the actual interest lost or the IRC Section 6621 for late payment of taxes. If your account would have suffered a loss then it can be argued that simply making the deposit brings your account to whole.

      Once the deposit is done and the interest is paid then the Excise tax will automatically waived if this is the first time they have gone through the program and the deposits were not more than 180 days late. It’s likely the case with your employer.

      So….definately not worth causing a fuss over. Simply ask that they comply with the rules from here on out. Do not go at them with all of the “would’s, could’s, and maybe’s” Reality is that they likely will pay minimal in taxes and interest. And your loss is not as large as you might think. 10% return for a 0 deposit that is 30 days late is a whopping .33. Is it really worth pissing your employer off over .33???? If so, you’ve got more to worry about then this late deposit!

      If you want to know more…go to the EBSA website and look through the VFC program. That’s the Voluntary Correction program for retirement plans.

      And remember, they may still have put the money into trust. Just because it’s not in your account doesn’t mean its not in trust. And if this is the case then you’re going to cause a fuss over nothing.

  4. QUESTION:
    What is the cut off date for rolling over my 401K into a Roth IRA so that it stays on 2006′s tax return?
    Say I made less than 90K in 2006, but I will make more than 150K in 2007 and I want to roll my 401K into a roth. Should I have done it before Dec/31/2006, Can I do it now before april 17th or is it possible to wait until after the april 17th deadline? Also will the rollover count towards my 2006 contribution limit for my roth IRA?

    • ANSWER:
      Congrats on your higher paying job! Unfortunately, you should have converted it before Dec. 31, 2006 to have it stay on your 2006 tax return. If you make more than 100k you can’t convert it until you make less than 100k or until after 2009. For 2010 and beyond the 100k limit is repealed. If you don’t want to leave it at your previous company you can still do a rollover of your 401k to a Traditional IRA and then convert it to the Roth IRA when it makes sense for you to do so. The rollover will not count towards any contribution limit for either the Traditional or Roth IRA.

  5. QUESTION:
    IRA 401k Contributions maximums?
    At my current job I put in 10% of my pay into a 401k and my company matches 6% of my pay. I want to start an IRA account (not roth), I want to know would I be eligible for the tax credit? And if so, what is the deadline for 2006?

    Thanks

    • ANSWER:
      April 15th 2007 is the deadline to put away $ for 2006, I believe.

      Also, eligibility for the traditional IRA is not influenced bu how much you put in a 401k but by how much you make. I think if you make less than K or so then you can do a traditional IRA. If you are married then combined you can’t make more than about 90 or 100K together.

      Check these #s against the IRS website… OR check with a financial advisor.

  6. QUESTION:
    How would my payroll company handle a ,000 ROTH 401K employee salary deferral?
    This is my first year contributing to my new 401k, and the employee contribution part of it is of the Roth 401k variety. I’m trying to figure out exactly how the payroll company is going to handle the breakdown.

    This is my business so I handle the company checking account. ,000 to 401k company, 13% employment taxes + income tax withholding? How much needs to be available in the account to cover everything?

    I asked my payroll company and so far the girl who handles my account seems a bit confused, and she is hesitant to give me a final breakdown for liability reasons; she says she doesn’t know the numbers until they run the final payroll.

    I need to figure this out soon since the deadline is quickly approaching.

    Thank you for any help!

    • ANSWER:
      You don’t say ifi you want any cash after the contribution, how much your annual pay is, or if you plan on making a bonus payment at the end of the year. You also don’t say if it’s a sole proprietorship, partnership, C-Corp, or a S-Corp. The timing of the contribution is dependent upon that. If it’s a sole prop or partnership then the deadline isn’t approaching so soon. you just need the deferral election in place. If it’s an S-Corp or C-Corp then the pay needs to be 2007 pay so your deadline is 12/31

      But, in general, with no cash back on the final check you should have at least 1.4x’s the deferral amount available for taxes. So in your case, ,000…

  7. QUESTION:
    Can I open a SEP IRA if my wife has a 401k at work?
    My wife makes over 5k per year and receives a w-2 from her employer. She contributes to a 401k through her employer. I am a self employed consultant, sole proprieter with NO employees and receive 1099′s from my clients. I earn about k/year. I know any standard IRA contribution by either of us is not tax deductible since she is in the 401k but if I open a SEP IRA are my contributions, tax deductible? Also, can I still open a SEP IRA before the filing deadline of April 15?

    • ANSWER:
      Yes, You can
      the max you could contribute to your SEP IRA is 49,000.00
      Your wife could max out her 401k at 16500.00