Unless you’re a financial expert, fully understanding how the deadlines for retirement plan contributions work probably isn’t on the top of your to-do list. You’ve got plenty of things on your plate and monitoring your retirement plan can often fall to the wayside. But you must understand your deadlines to avoid paying a penalty tax, losing or delaying a tax deduction or going through an IRS correction program.
To clear up any confusion and make things easier on you during tax time, we put together this post that will cover everything you need to know about the real deadline for retirement plan contributions.
Minimum funding and tax deduction deadlines
If you want to take a tax deduction for a contribution, you must deposit it by the due date of a tax return. It’s ok if the contribution is made after the tax return is filed—the deposit just must be made by the due date (typically April 15).
Contributions must also be made by September 15 for any plan that’s subject to minimum funding rules. This only applies to defined benefit (DB) and money purchase plans. While safe harbor 401(k)s have required contributions, they don’t have minimum funding rules.
This September 15 due date also applies to calendar year plans. Failure to meet the due date results in a 10 percent excise tax.
Annual addition deadline
An annual addition means any increase in a participant’s account balance due to 401(k) deferrals, matching contributions, profit sharing or anything else except investment earnings. An employee can’t receive unlimited annual additions, though. The limit is known as the 415(c) limit and is $56,000 or 100 percent of the employee’s compensation if under $56,000.
If a contribution falls under an annual addition, the deadline is 30 days after the initial due date of the tax return. A contribution can be treated as an annual addition for the prior year if it’s made within 30 days of the plan sponsor’s tax due date.
Twelve-month grace period for 401(k) contributions
Some 401(k) contributions can be made up to 12 months after the close of the year. These include some matching contributions and some nonelective contributions. This can get a little confusing when it comes to the real deadline for retirement plan contributions. So, we recommend only using this grace period as a last resort.
Discretionary contributions
Sometimes, employers feel generous and decide to contribute to a retirement plan without legally needing to. When that’s the case, the contributions must be made by the tax due date. If it’s deposited after the due date, it can be claimed for the following tax year.
We’re here to help
Hopefully, we’ve answered all of your questions about how do the deadlines for retirement plan contributions work. But if you still have questions or would like help planning your financial future, talk to our team at Fiduciary Advisors, LTD. We’re dedicated to maximizing your retirement plan to set you up for long-term success.