Important October Deadlines for IRAs

Don’t overlook key fall IRA deadlines to avoid additional tax liability or penalties.

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When it comes to individual retirement accounts (IRAs), overlooking key October deadlines could lead to spending time and money unraveling errors, additional tax liability, and/or penalties. As we prepare for colder weather and falling leaves, make note of these important October (and one in November) deadlines for several IRA actions you should consider taking.

October 1

• SIMPLE IRA Establishment. October 1 is the deadline for an employer to establish a SIMPLE IRA effective for 2021. A SIMPLE plan established after October 1 would not be effective until January 1, 2021, at the earliest. Notably, an exception applies for a newly established business. Learn more here.

October 15

• 2020 SIMPLE IRA Employer Contributions. Deadline for plan sponsors who have yet to make 2020 employer contributions (e.g., match or non-elective); they have until the tax-filing deadline plus extension. 
• 2020 SEP IRA Contribution. The deadline for funding a SEP IRA is the business’s tax-filing deadline plus extensions.

Practice Tip: Prior-year (2020) IRA contributions (e.g., Roth, traditional) are not permitted, even if an individual is on a tax-filing extension.

• Withdraw Excess IRA Contributions. An investor has until October 15 of the year after the excess contribution to remove it from the IRA—plus or minus earnings or losses on the excess contribution.

Excess contributions typically occur when individuals inadvertently contribute funds to an IRA that are otherwise not allowed. There are several situations that could result in excess IRA contributions, including but not limited to: making a traditional or Roth IRA contribution, even though the investor failed to satisfy eligibility; contributing more than the annual limit; or funding an IRA with an ineligible rollover, such as a required minimum distribution (RMD), or a hardship withdrawal, neither of which is permitted.

IRA owners, however, are often unaware that they have run afoul of funding rules and, upon being informed of their error, are unsure of how to make their account whole. The good news is that tax law permits excess IRA contributions to be withdrawn without penalty—if corrected within a certain time frame—that is, tax-filing deadline (plus extension). If not corrected by the deadline, the excess contribution plus earnings are subject to a 6% penalty for every year the excess remains in the IRA on IRS Form 5329PDF Document.

• Recharacterization of Roth IRA Contribution.  October 15, 2021 is the deadline to recharacterize an IRA contribution. The Tax Cut and Jobs Act of 2017 repealed the recharacterization of Roth IRA conversions from traditional IRAs and qualified plans (e.g. 401(k), 403(b) etc.) As a result, all Roth conversions taking place on or after January 1, 2018 are permanent.

However, recharacterizing Roth contributions is still permitted. For instance, a traditional IRA contribution can be recharacterized to a Roth IRA contribution and vice-versa. Have you changed your mind about which type of IRA to which you wanted to make your 2020 contribution? For example, maybe you previously contributed to a Roth IRA and now you feel a traditional IRA is more appropriate, or vice versa. Or more common, you contributed to a Roth IRA and later realized you were ineligible because your income exceeded the annual threshold.  For 2020, Roth IRA income phaseout is $124,000 -139,000 for single filers and $196,000-206,000 (married filing jointly).

October 31

• Naming a trust as a beneficiary. “Trust documentation” must be provided to the IRA custodian by October 31 of the year following the year of the IRA owner’s death. In other words, October 31 is the deadline for the trustee of an IRA inherited to a trust in 2020 to provide required documentation to the IRA custodian.

Providing documentation to the IRA custodian is one of the (4) requirements for a trust to qualify as a “look-through” trust. In addition, here are the requirements that must be satisfied to qualify as a look-through trust:

1. Trust must be a valid trust under state law
2. Trust must be irrevocable at death
3. Beneficiaries of the trust must be identifiable
4. Required trust documentation has been provided to the plan administrators by October 31st of the year after the IRA owner’s death.

November 1

• SIMPLE IRA Employee Notification. November 1 is the deadline for plan sponsors to notify eligible employees. This is accomplished by distributing an annual notice prior to the beginning of a new plan year.

The election period generally is the 60-day period immediately preceding January 1 of a calendar year for employers who continue offering a SIMPLE IRA plan for 2021. The annual notice will provide plan specifics, including eligibility (make or changes salary deferrals) and employer contributions (e.g., 3% match, or 2% non-elective) for the 2021 plan year.

Practice Tip: Once the employer contribution formula is determined, it cannot be modified until the following plan year.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education.  None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

 These materials do not purport to provide any legal, tax, or accounting advice.

 The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.