By Andy Ives, CFP®, AIF®
IRA Analyst

As we inch toward the extended 2020 tax deadline of May 17, many filers are still laboring over their returns. Some are completing the final return for a loved one lost in what was a brutal year. As is human nature, most taxpayers try to squeeze every last deduction and income-reducing item into their prior-year numbers. While maximizing all available and legal tax-cutting strategies is the proper way to file a return, be aware that not all tax benefits are available to all tax filers, especially after a person has passed away.

One common question is, “Can I make an IRA contribution for my deceased spouse or family member?”

The IRS ruled long ago that, once an IRA owner dies, a contribution cannot be made on that person’s behalf. The rationale from the IRS cannot be argued with. In one of the most logical IRS opinions ever issued, the IRS simply said that a contribution made after the death of the account owner “would not be a contribution for retirement purposes.”

In other words, a retirement contribution (either for the current year or prior year) cannot be made after you are dead because you no longer need a retirement plan. The IRS stated that “the primary purpose of the IRA is for retirement.” Even if a person was alive for the entire prior year and had qualified earnings, no contribution is allowed.

Example: Simon died from COVID-19 in February 2021, but he had not yet made his IRA prior-year contribution for 2020. Even though Simon had qualified earnings in 2020 and was alive for the entire year, his representative cannot initiate a prior-year 2020 IRA contribution on Simon’s behalf. If the contribution is made, it will be an excess contribution and potentially subject to a 6% penalty.

While a person with qualified earnings cannot have an IRA contribution made for him after death, a spousal contribution could be made based on the deceased person’s earnings. If Simon (from the example above) had a wife, and if she did not have any earned income of her own, she could make a prior-year 2020 IRA contribution for herself based on Simon’s qualifying income. After all, she is still alive and, in the eyes of the IRS, still in need of retirement dollars.

Conversely, a prior-year SEP IRA contribution can be made for an individual after that person has died. Why the differing rules? SEP contributions are not made by the account owner himself, but rather by the employer. The employer must still fund a SEP IRA for a qualifying employee, even if the employee has since passed away.

We can all agree that 2020 was a struggle, and we lost far too many people unnecessarily. As we work through our own tax returns (and those returns for the recently departed), be sure to know the rules. We all want to put the final punctuation mark on 2020. Be careful not to extend that miserable year by making an avoidable IRA contribution mistake.