To take a deduction for contributions for a particular year, the qualified plan must be adopted by the due date of the tax return for the plan year including extensions.
A True
B False
The correct answer and explanation is:
The correct answer is A. True.
To take a deduction for contributions made to a qualified retirement plan, the plan must be adopted by the due date of the tax return for the plan year, including any extensions. This means that the plan must be established and effective before the deadline for filing the tax return for the year in which the contributions are being claimed as a deduction.
For example, if a business wants to take a deduction for contributions made to a 401(k) plan for the 2024 tax year, the plan must be adopted by the tax filing deadline for 2024, which is typically April 15, 2025. If the business files for an extension, the deadline would be extended to October 15, 2025. Contributions made after the adoption of the plan but before this extended filing date may be deducted on the 2024 tax return.
This rule is important because it ensures that businesses are in compliance with tax laws and can maximize the tax benefits associated with retirement plan contributions. Additionally, it encourages timely adoption and funding of retirement plans to benefit employees and ensure adequate retirement savings.
The IRS requires this deadline to maintain order in the system and ensure that taxpayers do not claim deductions for contributions to a plan that had not been officially established or had not yet met the necessary regulatory criteria. Therefore, it is crucial for businesses and individuals to adhere to the deadlines for establishing and funding their qualified plans to maximize the associated tax benefits.