April 6, 2021

IRS Postpones Deadlines for 2020 IRA Contributions and Other Transactions

Denise Appleby reviews the IRS’s postponement of 2020 IRA contributions and other transactions

The IRS recently issued Notice 2021-21, in which they provide a list of transactions and reports for which deadlines are postponed. This postponement is in response to the ongoing COVID-19 pandemic and applies to “Taxpayers Affected by COVID-19 Emergency” (Affected

taxpayers).

The Definition of “Affected Taxpayer”

According to Notice 2021-21, the following are Affected Taxpayers and qualify for this automatic postponement.

  • Form 1040 Filers: Any person with a Federal income tax return filed on Form 1040 series return, where the tax filing due date would have been April 15, 2021, had it not been for this postponement.  Form 1040 series are Form 1040, Form 1040-SR, Form 1040-NR, Form
    IRA 2020 contribution deadline postponed

    1040-PR, Form 1040-SS, or Form 1040 (SP).

The tax filing due date for these individuals is postponed to May 17, 2021.

  • Issuers of Form 5498: Custodians and trustees that file Form 5498 series, where the due date would have been June 1, 2021, without the postponement. Form 5498 series are Form 5498, IRA Contribution Information, Form 5498-ESA, Coverdell ESA Contribution Information, Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information.

The due date for Form 5498 series is postponed to June 30, 2021.

IRA Contributions and Other Actions Postponed to May 17, 2021

The automatic postponement covers certain transactions and payments that otherwise would have had a deadline of April 15, 2021, and tied to the filing of Form 1040 series. These include:

  • Making Traditional and Roth IRA contributions: An IRA owner must make any IRA contributions for a year by their tax-filing due date for that year.
  • Paying the 10% early distribution penalty: An individual must pay any federal income tax owed for a year by the individual’s tax return due date. This includes the 10% additional tax (early distribution penalty) owed on the taxable portion of any distributions taken before the account owner reaches age 59 ½ and does not qualify for an exception.
  • Paying the 6% excise tax on excess contributions: For the 2020 tax year, the 6% excise tax applies to any pre-2020 excess IRA contribution not distributed by December 31, 2020.

The postponement also covers elections made on IRS Form 1040 series return, schedules, returns, and other forms filed as attachments. These include the following:

  • Election to treat a Traditional IRA contribution as deductible or nondeductible. Nondeductible Traditional IRA contributions must be reported on IRS Form 8606. Deductible contributions are reported on Form 1040 series.
  • Election to include a coronavirus-related distribution in income for 2020. The default is to spread the income ratably over three years. A taxpayer may instead elect to include the entire amount in income for 2021. This election is made on IRS Form 8915-E.
  • Filing IRS Form 8915-E to report 2020 coronavirus-related distributions, qualified disaster distribution other than a coronavirus-related distribution, and qualified distribution for the purchase or construction of a main home in qualified 2020 disaster areas that are repaid, in whole or in part, no earlier than the first day of the disaster and no later than June 25, 2021.
  • Filing IRS Form 5329 to report any additional tax on distributions. And,
    Filing IRS Schedule SE (Form 1040) to figure the tax due on net earnings from self-employment.

 

No Postponement for Correcting Excess Salary Deferrals

The postponement does not appear to apply to the deadline for distributing excess salary deferral contributions that were made to section 401(k) plans, section 403(b) plans, or SARSEPs. While the deadline for distributing excess salary deferral contributions is April 15, it is not tied to the due date for filing a tax return. Compare that with the deadline for making an IRA contribution, which is described as “the time prescribed by law for filing the return for such taxable year (not including extensions thereof)”. Therefore, unless the IRS explicitly states the deadline for distributing excess salary deferral contributions has been postponed, the deadline is still April 15, 2021, for excess salary deferrals made in 2020.

Employer Contribution Postponement for Sole Proprietors Only

A business that maintains an employer level retirement plan, such as a simplified employee pension (SEP) plan, profit-sharing plan, a 401(k) plan, or a SIMPLE IRA, has the tax filing due date of the business, including extensions, to make employer contributions to the plan. This would have been April 15, 2021, for 2020 contributions for sole proprietors that operate on a calendar year basis. Employer contributions for sole proprietors are reported on Form 1040, and contributions for their employees are reported on Schedule C- which is filed as an attachment to Form 1040. This means that sole proprietors are Affected Taxpayers and therefore have until May 17, 2021, to make employer contributions for 2020.

Not Available to Other Businesses

The postponement does not apply to other types of businesses, as they do not file Form 1040 series and are therefore not considered Affected Taxpayers for purposes of the postponement in Notice 2021-21.

Tax Filing Extension Applicability

Businesses that file for extensions have six months after their tax-filing due date to make employer contributions to retirement plans. But, Affected Taxpayers need not apply for extensions, such as filing Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, to qualify for this postponement, as it is automatic.

Reminder: Tax-filing extensions do not apply to IRA contributions.

Be on the Look-Out for More Postponements

For the 2019 tax filing season, the IRS issued multiple updates in which they added more transactions with each new announcement. If the postponements for the 2019 tax season indicate what might be forthcoming, we should not be surprised if the IRS issues additional updates in which they postpone more deadlines for the 2020 tax season.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

Frequently Asked Questions Regarding

It is not necessary to establish a separate IRA for nondeductible contributions, as all your traditional, SEP and SIMPLE IRAs are treated as one IRA for purpose of determining the taxable amount of any distribution from either of those IRAs. For instance, assume you have three IRAs, one with $2,000 nondeductible contribution, another with $4,000 deductible contributions, and the third with $4,000 SEP IRA contribution. If you take a distribution of $2,000, the distribution will be prorated to include 1/5 nontaxable amount and 4/5 taxable amount, regardless of which of the traditional, SEP or SIMPLE IRA the distribution is taken from.

You must file IRS Form 8606 to keep track of the nontaxable (nondeductible) amounts. Form 8606 must also be filed for any year that you take a distribution from any of your traditional, SEP or SIMPLE IRA, so as to determine the taxable and nontaxable portion of the distribution.

It depends.

If you are not an active participant or married to an active participant, the contribution is fully deductible.

If you are an active participant, and/or married to an active participant, the deductibility of the contribution would be determined by your modified adjusted gross income (MAGI) amount and tax filing status.

Despite the fact that you worked for only one month, you can still be considered an active participant if you received contributions and/or benefits under the plan.  However, the determination of your ‘active participant ‘status depends on the type of retirement plan, your eligibly for participating in the plan and/or if contributions are made to the plan for the year.

A rollover (or rollover contribution) is a redeposit of assets that were withdrawn from a retirement account, such as an IRAqualified plan403(b) account or a 457(b) plan, to an eligible retirement account/plan. (See chart on page 1 for the plans between which rollovers can be completed.) There are two types of rollovers, namely,  indirect rollovers and direct rollovers.  Withdrawals representing both types of rollovers are reported on IRS Form 1099-R. If the receiving account is an IRA, the rollover is reported on IRS Form 5498.

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