Key Takeaways
- Active participant status refers to individuals who contribute to or benefit from employer-sponsored retirement plans such as 401(k) or pensions.
- Active participant status affects eligibility for certain deductions on individual retirement accounts (IRAs).
- You need to understand your active participant status to determine tax implications and retirement planning.
- The IRS determines active participant status through salary deferrals and employer contributions to retirement plans.
- Knowing your active participant status helps in better financial planning for retirement.
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What Is Active Participant Status?
An active participant takes part in a workplace retirement plan, such as a 401(k), and gets benefits or contributions through that plan during the year. Put simply, it means you’re building your retirement savings through your employer. This can affect how much you’re allowed to deduct when contributing to certain retirement accounts, like an IRA. Understanding whether you’re an active participant can help you make better retirement decisions and avoid tax surprises.
Not Active Participant
Certain individuals are “not active participants.” An individual is not an active participant under a plan for any taxable year when that individual chooses, pursuant to the retirement plan, not to participate in the plan.
How Active Participant Status Works
An active plan participant has the right to receive benefit payments from a pension plan, whether it is a defined-benefit (DB) or a defined-contribution (DC) pension plan, as long as the requirements under the plan’s contract have been fulfilled.
Active participant status applies to individuals who are currently participating in one or more of the following types of retirement plans:
Under most defined-benefit pension plans, the member is required to complete a minimum number of years of service in order to qualify for their maximum allowable pension. The tax law definition of an “active participant” for a company plan could thus include employees not currently participating in the employer’s plan.
IRA Contributions for Active Participants
The specification of an active participant has important implications as to whether or not someone is eligible to claim a tax deduction for a contribution to a traditional IRA, and certain rules around the designation can be hard to clarify. If you and/or your spouse are active participants for a given year, you may need to perform a calculation to determine whether you are able to deduct your IRA contributions for that year.
If you are not able to deduct the full amount, you may be able to deduct a smaller portion, depending on your modified adjusted gross income (MAGI).
Limits and Ranges for Tax Deduction Phase-Outs
Below are the income phase-out ranges for deducting a contribution to a traditional IRA in 2023 and 2024 as outlined by the Internal Revenue Service (IRS).
In 2023, if you’re single, covered by a workplace retirement plan, and earn more than $73,000 but less than $83,000 in income, you can deduct a portion of your traditional IRA contributions. You are eligible for the full deduction if you earn $73,000 or less, and are ineligible for any deduction if you earn $83,000 or more. For 2024 IRA contributions, the income phase-out range is slightly higher: $77,000 to $87,000.
In 2023, if you are married, filing jointly, or a qualified widow(er), and your spouse is covered by a workplace plan, the income limit range is $116,000 to $136,000, and in 2024, the range is $123,000 to $143,000.
However, if you’re an IRA contributor who isn’t covered by a workplace retirement plan, but you’re married to someone who is covered, the income phase-out range for you both as a couple is $218,000 and $228,000 in 2023, and $230,000 to $240,000 for 2024. For example, in 2024, your tax deduction begins to get reduced at $230,000, and the deduction gets eliminated at $240,000 and higher.
The IRS adds that employers are required to check box 13 on your Form W-2 if they are active participants for the year, where the employer will check off the “Retirement Plan” box. Individuals should check with their employers to be sure. Ultimately, you may want to consult with your tax professional for assistance with determining whether your IRA contribution is deductible.
What Is an Active Participant in a 401(k) Plan?
An active participant in a 401(k) plan is an individual who is employed at a company in the year in question and who is eligible to participate in the plan even if they do not make contributions.
Can an Active Participant Contribute to a Roth IRA?
Yes, an active participant can contribute to a Roth IRA. It is common for people to contribute to both employer-sponsored plans and Roth IRAs. Individuals have to be mindful of their modified adjusted gross income (MAGI) to see if they are eligible to contribute to a Roth IRA.
Can I Contribute to Both a Traditional IRA and a Roth IRA?
Yes, you can contribute to both a traditional IRA and a Roth IRA. You will have to ensure that the total contributions into both accounts don’t exceed the contribution limits provided by the IRS: $6,500 in 2023 and $7,000 in 2024, and an additional $1,000 catch-up contribution each year if you are age 50 or older.
The Bottom Line
Active participant status refers to an individual’s current participation in various employer-sponsored retirement plans such as 401(k) plans or defined-benefit pensions. Therefore, the individual is eligible to receive plan benefits upon retirement.