401(a) Profit Sharing Retirement Savings Plan

401(a) profit sharing plans are contributory plans under which the amount contributed to the employee's account is based on a percentage of the employer's profits.

Massachusetts follows the federal treatment for the following:

  • Contributions made by an employer on behalf of an employee to a 401(a) profit sharing plan that includes cash or deferred payment option are excluded from the employee's gross income in the year contributed;
  • Income earned on the contributions while in the 401(a) plan account is excluded from gross income;
  • Distributions made to the retiree from the 401(a) plan under the cash option or from the deferred payment option of the profit sharing plan are included in gross income in the year paid.

401(k) Qualified Cash or Deferred Arrangement Plan - CODA

A qualified cash or deferred arrangement (CODA) is a type of IRC § 401(a) qualified profit-sharing, stock bonus or money purchase plan that is commonly referred to as a 401(k) plan. A CODA allows an employee to choose between receiving cash or electing to have the cash placed in a qualified pension plan thereby deferring current recognition of income.

A Qualified CODA Is Commonly Referred to as a "401(K)" Plan:
To be qualified, a CODA must satisfy the standard discrimination requirements, distribution limitation rules (such as the prohibition of distributions before age 59 1/2) and the nonforfeitability requirements.

Individuals:

Massachusetts follows the federal treatment for the following:

  • Contributions made by an employer to a 401(k) plan are excluded from the employee's gross income in the year contributed;
  • Contributions made by an employee to a 401(k) plan are included in the employee's federal gross income;
  • Elective contributions (deferrals) made by an employee to a 401(k) plan or CODA are excluded from the employee's gross income. When an employee chooses to make elective contributions rather than receive cash, such contributions are considered to be made on behalf of the employee by the employer and are not treated as employee contributions. Instead, such elective contributions are given the same pre-tax benefit as employer's contributions to a qualified plan;

    2012 exclusion amounts for elective deferrals, including "catch-up" contributions - see table
  • Income earned on the contributions while in the 401(a) plan account is excluded from gross income;
  • Distributions made to an employee from a 401(k) plan are fully taxable and either can or will take place when one of the following happens:
    • separation from service, death or disability;
    • termination of plan without establishing another plan;
    • reaching age 59 1/2;
    • a corporate employer's disposition of substantially all of its assets; or
    • hardship.

Special "Catch-Up" Provision:
A limited "catch-up" provision allows employees in the last three years before reaching normal retirement age to defer larger amounts, provided that the full amount has not been used in prior years.

Partners:

Partnership and Sole Proprietorship 401(k) Plans:

A partnership or sole proprietorship may maintain a 401(k) plan on behalf of its employees, and individual partners or owners are permitted to make cash or deferred elections.

  • for Partnerships - a cash or deferred arrangement includes any arrangement that directly or indirectly allows partners to vary the contributions made on their behalf. A partnership is treated as the employer of each partner who is an employee. Contributions on behalf of a partner include contributions made by the partnership and contributions made by the partner as a deemed employee;
  • for sole proprietorships, the owner is treated as the employer. Contributions on behalf of an owner of a sole proprietorship include contributions made by the owner as both the deemed employer and as a deemed employee.

Federal Income Tax Treatment of Elective Contributions and Matching Contributions on behalf of Self-Employed Individuals:
An individual partner or owner of a sole proprietorship may make elective contributions to a 401(k) plan based on compensation for services he or she provides to the partnership or sole proprietorship, and the partnership or sole proprietorship can make matching contributions with respect to these elective contributions. These contributions are deductible by the partnership or sole proprietorship to the extent they are within annual limits as provided by the Code :

  • For partnerships - the partner's distributive share of the partnership's deduction flows through to the partner.
    • for a defined contribution plan - the partner's distributive share of the deduction is that portion of the deduction attributable to contributions made on the partner's behalf;
    • for a defined benefit plan - the partner's distributive share of the deduction is determined in the same way as his or her distributive share of income.

The partner's distributive share of the deduction for contributions on his or her behalf is reported on Schedule K-1 of Form 1065, U.S. Partnership Return of Income, in the box for other deductions and reported on the partner's Form 1040, U.S. Individual Income Tax Return, line 28

  • for sole proprietorships - In the case of a sole proprietorship, the owner's deduction is reported on his or her Form 1040, U.S. Individual Income Tax Return, line 28, and not on Schedule C of Form 1040.
The mechanism under the Code for deferring a partner's or owner's income on account of contributions to a 401(k) plan is a deduction; there is no separate form of "exclusion" from a partner's or owner's income.

Massachusetts does not follow the federal treatment for the following:
in calculating adjusted gross income, Massachusetts generally allows the deductions available under I.R.C. § 404. However, effective for taxable years beginning on or after January 1, 2008, the deduction for contributions on behalf of partners and owners of sole proprietorships is specifically disallowed. There is no other Massachusetts provision that would provide a deduction or exclusion for such amounts for a partner or owner. The Massachusetts Schedule 3K-1 must reflect the add back of the disallowed deduction.

Distributions from the Plan:

  • for partnerships, when the partners (or former partners) receive distributions under the plan, the partners may deduct their distributive shares of the IRC § 404 deduction that was allowed federally but disallowed by Massachusetts in a prior year;
  • for sole proprietorships, when owners (or former owners) receive distributions under the plan, they may deduct the amount of the IRC § 404 deduction that was allowed federally but disallowed by Massachusetts in a prior year.

Partners and other self-employed individuals must retain records to substantiate the deduction of previously taxed contributions.

Bank Pension: Savings Bank, Credit Union and Co operative Bank Employee's Retirement Association Pension Plan

The Savings Banks Employee's Retirement Association (SBERA) was organized for the purpose of providing pensions for eligible employees of participating banks who retire on account of age or disability.

Massachusetts treatment for the following:

  • Contributions made by both the employee and employer for the benefit of eligible employees participating in a bank plan are excluded in the income of the employee in the year contributed. These amounts are not subject to Massachusetts withholding and are not included on the Form W-2 - Wage and Tax Statement, as wages or other compensation until the year in which the funds are made available to the employees;
  • Income earned on the contributions while in the bank plan is excluded from gross income;
  • Distributions made to the retiree from a bank plan are included in Massachusetts gross income and are subject to withholding of Massachusetts income taxes during the taxable year in which such amounts are paid or otherwise made available to such employees through retirement or disability.

Education Savings Account, Coverdell - CESA

Coverdell Education Savings Accounts (CESA) (previously called Education IRA and created in 1998) are tax-favored vehicles to help low and middle income taxpayers save for qualified higher education as well as for elementary and secondary education expenses. Earnings accumulate tax-free on CESA contributions, and distributions of income are tax free to the extent that they are used to pay the beneficiaries' qualified higher education expenses during the year in which the distribution is made.

Married filing separate taxpayers may not set up for Education IRAs.

Massachusetts follows the federal treatment for the following:

  • Contributions made by an individual or by married filing joint taxpayers to a CESA are limited in amount and are not deductible.
    The maximum yearly nondeductible contribution allowed to an education savings account depends upon the amount of the individual's modified federal adjusted gross income (AGI);
2012 contribution amounts: Individuals or married filing joint taxpayers may contribute up to $2,000 annually per beneficiary.
  • Income earned on the contributions while in the CESA is excluded from gross income;
  • Distributions made to the individual from the CESA are excluded from gross income to the extent they are excluded from federal gross income. In general, federal rules determine that distributions are tax free to the extent that they are used to pay the beneficiaries' qualified higher education expenses during the year in which the distribution is made.

Massachusetts adopts the federal treatment for Education Savings Accounts under the Internal Revenue Code, as amended and in effect on January 1, 2005 and automatically adopts any future changes to the federal provisions for these accounts.

Taxpayers May Contribute to Both Education IRA and Roth/Traditional IRAs:
The beneficiary is considered the owner of an Education IRA, therefore, taxpayers may make contributions to both an Education IRA set up for the benefit of a child and to their own individual retirement account provided they meet the federal AGI thresholds. For example, for tax year 2012 a husband and wife filing joint with three children under age of 18 may make the following contributions provided they meet the federal AGI thresholds:

  • $2,000 for each beneficiary - total contribution is $6,000;
  • $5,000 to Roth/Traditional IRA for each spouse - total contribution is $10,000.

IRA, Individual Retirement Account - Distributions for Charitable Purposes

The Pension Protection Act of 2006, (P.L. 109-280) provided for an exclusion from federal gross income for distributions made in tax years 2006 and 2007 from traditional and Roth IRAs to qualified charities that would otherwise be taxable income. Subsequently, the federal exclusion was extended for distributions made in tax years 2008 through 2011.  The federal American Taxpayer Relief Act of 2012 (H.R. 8) extends the exclusion for distributions made in tax years 2012 and 2013.

The exclusion applies to:

  • distributions made on behalf of taxpayers who are at least 70 ½ on the date of distribution in 2010 or 2011;
  • distributions made up to a maximum of $100,000 per year; and
  • Traditional and Roth IRAs.

The exclusion does not apply to Simplified Employee Pension plans, SIMPLE plans, Keoghs, or any other retirement plan such as an IRC § 401(k), 403(b), defined benefit or contribution plan or profit sharing plan.

Massachusetts Adopts the Federal Exclusion for IRA Distributions to Qualifying Charities:
Massachusetts adopts the new provision allowing an exclusion from gross income for distributions from traditional and Roth IRAs.

Massachusetts does not allow a deduction for contributions made to an IRA regardless of an allowable federal deduction for such contributions. To prevent double taxation of any previously taxed contributions upon distribution from the IRA, Massachusetts allows a tax deduction for IRA distributions up to the aggregate amount of previously taxed contributions.

Examples

Federally deductible contributions = contributions deductible in calculating federal AGI
Federally nondeductible contributions = contributions included in federal AGI

Example #1: Non-charitable Distribution Years 1 and 2

Year 1 - taxpayer received a non-charitable distribution of $80,000 from a traditional IRA.
Year 1 traditional IRA balance = $100,000 consisting of:

  • $20,000 of federally nondeductible contributions;
  • $30,000 of federally deductible contributions; and
  • $50,000 of accrued earnings.

For federal purposes: the nontaxable portion of the distribution was $16,000, determined by multiplying the amount of the distribution ($80,000) by the ratio of the nondeductible contributions to the account balance ($20,000/$100,000). Therefore, $64,000 of the distribution ($80,000 minus $16,000) was included in federal gross income.

For Massachusetts purposes: $50,000 of the distribution constitutes contributions previously taxed in Massachusetts and was deducted from Massachusetts gross income. The remaining $30,000 representing accrued earnings was included in Massachusetts gross income.

Year 2 - taxpayer received the remaining balance of $20,000 of accrued earnings from the traditional IRA.

For federal purposes: $4,000 of the distribution was treated as return of nondeductible contributions. The nontaxable portion of the distribution was $4,000, determined by multiplying the amount of the distribution ($20,000) by the ratio of the nondeductible contributions to the account balance ($20,000/$100,000). Of the $20,000 distribution, $4,000 was nontaxable and $16,000 was included in federal income.

For Massachusetts purposes: taxpayer had no remaining balance of contributions previously taxed in Massachusetts. Therefore the entire $20,000 distribution was included in Massachusetts gross income.

Example #2: Charitable Distribution Year 1; Non-charitable Distribution Year 2

Year 1 - taxpayer directed the trustee of a traditional IRA to distribute $80,000 to a charity.
Year 1 traditional IRA balance = $100,000 of:

  • $20,000 of federally nondeductible contributions;
  • $30,000 of federally deductible contributions; and
  • $50,000 of accrued earnings.

For federal purposes: the entire $80,000 distribution was excluded from federal gross income as a qualifying distribution.

For Massachusetts purposes: $50,000 of the distribution constitutes contributions previously taxed in Massachusetts and was deducted from Massachusetts gross income. The remaining $30,000 was excluded from Massachusetts gross income as a qualifying distribution to a charity.

Year 2 - taxpayer received the remaining balance of $20,000 of accrued earnings from the traditional IRA; this was not a qualifying distribution to a charity.

For federal purposes: IRA distributions to qualified charities were treated as consisting of income first with no proportionate reduction in the taxpayer's nondeductible contributions. Therefore, none of the taxpayer's nondeductible contributions was used in year 1 and the entire $20,000 was treated as the taxpayer's remaining balance of nondeductible contributions and therefore was excluded from federal income.

For Massachusetts purposes: taxpayer had no remaining balance of contributions previously taxed in Massachusetts. Therefore the entire $20,000 distribution was included in Massachusetts gross income.

Example #3 - Charitable Distribution Year 1

Year 1 - taxpayer directed the trustee of a traditional IRA to distribute $100,000 to a charity.
Year 1 traditional IRA balance = $100,000 of:

  • $20,000 of federally nondeductible contributions;
  • $30,000 of federally deductible contributions; and
  • $50,000 of accrued earnings.

For federal purposes: The entire $100,000 distribution was excluded from federal gross income as a qualifying distribution.

For Massachusetts purposes: the entire $100,000 distribution was excluded from Massachusetts gross income, $50,000 of which was a return of nondeductible contributions, and $50,000 of which was a qualifying distribution to a charity. 

IRA, Individual Retirement Account - Roth IRA

Roth IRAs are nondeductible contributory IRAs that allow for tax free accumulation of income. It is a retirement plan to which an individual may contribute a maximum amount annually. For joint filers, each may contribute up to the maximum amount allowable. It is a nondeductible contributory IRA that allows for tax-free accumulation of income as well as for tax-free distributions of income if certain conditions are met.

Taxpayers may set up and make contributions to Roth IRAs provided:

  1. they (or, if filing joint, their spouses) received taxable compensation during the year; and
  2. they are not age 70 1/2 by the end of the year.

Massachusetts follows the federal treatment for the following:

  • Contributions made by an individual to a Roth IRA account are limited in amount and are not deductible. The maximum yearly nondeductible contribution allowable to a Roth IRA depends upon the amount of the individual's modified federal adjusted gross income (AGI);
2012 contribution amounts, including "catch-up" contributions:
An individual may contribute the smaller of: 1) $5,000 annually, or 2) his or her taxable compensation for the year. Additionally, individuals who are at least 50 years of age by the end of the tax year are permitted to make "catch-up" contributions; the maximum catch-up contribution to an IRA is $1,000;
  • Income earned on the contributions while in the Roth IRA account is excluded from gross income;
  • Distributions made to the individual from the Roth IRA account are excluded from gross income to the extent they are excluded from federal gross income. A qualified distribution is excludable if the IRA is held for a five year period and one of the following conditions is met:
    • at the time of the distribution, the recipient is at least 59 1/2 years old;
    • the distribution must be made to a beneficiary or the individual's estate on or after the date of death;
    • the recipient is disabled; or
    • the distribution, up to a maximum of $10,000, is being used to pay for a qualified first time homebuyer expense.

Massachusetts adopts the federal treatment for Roth IRAs, under the Internal Revenue Code, as amended and in effect on January 1, 2005 and automatically adopts any future changes to the Federal provisions for Roth IRAs.

For joint filers, each may contribute up to the maximum amount allowable provided they meet the federal AGI thresholds.

Roth/Traditional IRA Contributions:
For tax year 2011, the maximum total yearly contribution that may be made by an individual to all IRAs, Regular and Roth, is $5,000, not counting rollover contributions; $6,000 for individuals who are at least 50 years of age by the end of the tax year who are permitted to make "catch-up" contributions.

Roth IRA Not Held for Five Year Period, Distributions May Not Be Excluded:
If a distribution is made before the expiration of the five-year period, or one of the four conditions is not met, it does not qualify for the exclusion; any earnings on the contributions would be included in federal gross income and therefore would be included in Massachusetts gross income.

Qualification for Amount of Taxable IRA Distribution is determined by completing the following worksheets:

  • for residents, the Schedule X, Line 2 Worksheet - Taxable IRA/Keogh Plan and Roth IRA Distributions;
  • for part-year residents who are taxed on IRA distributions received as a Massachusetts resident, Schedule X, Line 2 Worksheet - Taxable IRA/Keogh Plan and Roth IRA Distributions.

Nonresidents are not taxed on IRA distributions.

IRA/Keogh Plan and Roth IRA Conversion Distributions Worksheet Example

IRA, Individual Retirement Account - Traditional IRA (Regular)

Individual Retirement Accounts (IRA) are retirement plans to which an individual may contribute a maximum amount annually. For joint filers, each may contribute up to the maximum amount allowable. Earnings accumulate tax-free on IRA contributions but distributions of income may be taxable. Massachusetts does not allow a deduction for IRA contributions.

Taxpayers may set up and make contributions to Traditional IRAs provided:

  1. they (or, if filing joint, their spouses) received taxable compensation during the year; and
  2. they are not age 70 1/2 by the end of the year.

Massachusetts follows the federal treatment for the following:

  • Contributions made by an Individual to a traditional IRA plan are included in gross income. For federal purposes, an individual may claim either all or part of the contribution as a deduction on U.S. Form 1040 provided certain criteria are met. Massachusetts, however, does not allow a deduction for such contributions.

    2012 contribution amounts, including "catch-up" contributions:
    An individual may contribute the smaller of: 1) $5,000 annually, or 2) his or her taxable compensation for the year. Additionally, individuals who are at least 50 years of age by the end of the tax year are permitted to make "catch-up" contributions; the maximum catch-up contribution to an IRA is $1,000.
  • Income earned on the contributions while in the IRA account is excluded from gross income;
  • Distributions made to an Individual from the IRA account are included in gross income. For Massachusetts purposes however, distributions made are excluded from gross income to the extent that such distributions represent Massachusetts previously taxed contributions.

Similarly, for federal purposes, distributions are excluded from gross income to the extent that they represent contributions for which no deduction was allowed due to federal laws pertaining to deductibility of contributions.

Taxpayer Advice in Massachusetts:
Taxpayers with a traditional IRA should keep a record of all contributions made that were included in Massachusetts gross income. Records would include: statements from banks or other financial institutions to verify contributions and distributions to date, including source of any rollover;  copies of U.S. Form 1099-R - Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts;  Federal Forms 8606 - Nondeductible IRAs.

For joint filers, each may contribute up to the maximum amount allowable.

Roth/Traditional IRA Contributions:
For tax year 2011, the maximum total yearly contribution that may be made by an individual to all IRAs, Regular and Roth, is $5,000, not counting rollover contributions; $6,000 for individuals who are at least 50 years of age by the end of the tax year who are permitted to make "catch-up" contributions.

Nonresidents Moving into Massachusetts:
There is no adjustment for previously taxed contributions under Section 2(a)(2)(F) to a nonresident moving into Massachusetts since the contributions were never taxed by Massachusetts. See LR 82-124: Distribution to Beneficiary of an IRA.

Beneficiaries of an IRA Account:
The same rules apply, i.e., distributions are excluded from Massachusetts gross income to the extent they represent previously taxed contributions. Therefore, if a taxpayer is a resident of Massachusetts but a beneficiary of a non-Massachusetts source IRA, the entire IRA distribution is taxable since no Massachusetts tax was ever paid on the income when contributed.

Husband and Wife Each Receive IRA Distributions:
Taxpayers must complete separate worksheets if married filing a joint return and both spouses received IRA/Keogh Plan and/or Roth IRA distributions.

Qualification for Amount of Taxable IRA Distribution is determined by completing the following worksheets:

  • for residents, the Schedule X, Line 2 Worksheet - Taxable IRA/Keogh Plan and Roth IRA Distributions;
  • for part-year residents who are taxed on IRA distributions received as a Massachusetts resident, Schedule X, Line 2 Worksheet - Taxable IRA/Keogh Plan and Roth IRA Distributions.

Nonresidents are not taxed on IRA distributions.

IRA/Keogh Plan and Roth IRA Conversion Distributions Worksheet Example

IRA, Individual Retirement Account - Traditional IRA Rollover (Conversion) to a Roth IRA 

Federal Treatment

Generally, a taxpayer may make a partial or complete rollover from a traditional (deductible or nondeductible) IRA to a Roth IRA. The amount treated as a distribution and included in federal gross income in the year of a qualified rollover from a traditional IRA to a Roth IRA is the amount of previously deductible contributions plus the amount attributable to growth (e.g., interest, dividends and appreciation).

  • If a taxpayer made only deductible contributions to a traditional IRA, then all distributions from the IRA are fully taxable to the owner or beneficiary as ordinary income.
  • However, if nondeductible contributions were made, the owner has a cost basis in the IRA. An individual's cost basis in distributions made from a traditional IRA is the sum of the nondeductible contributions made to the IRA minus any prior withdrawals or distributions of nondeductible contributions. The recovery of this basis is not recognized as taxable income.

Massachusetts Treatment

Any taxable portion of rollovers included in federal gross income is also included in Massachusetts gross income, except for Massachusetts previously taxed contributions.

A rollover is not available to a taxpayer who is married filing separate.

Tax Increase Prevention and Reconciliation Act of 2005 (P.L. 109-222) - Rollovers for Tax Year 2010:

For federal income tax purposes, the act provides the following for taxpayers:

  • regardless of income level, taxpayers were allowed to convert traditional IRAs to Roth IRAs effective for tax years beginning after December 31, 2009 and ending prior to January 1, 2011. Previously, only taxpayers with federal adjusted gross incomes of $100,000 or less could exercise this option; and
  • unless a taxpayer elected to include the applicable conversion amount in gross income in 2010, none of the amount from such conversion was includible in income in 2010; half of the gross income is includible in 2011 and half in 2012;

Massachusetts adopts these two provisions since it follows the federal treatment for Roth IRAs, under the Internal Revenue Code, as amended and in effect on January 1, 2005 and automatically adopts any future changes to the Federal provisions for Roth IRAs.

Impact of Rollover Provision Completed in 2010 - Federal Provision:
In 2010, a taxpayer rolls over his traditional IRA to a Roth IRA. Prior to the rollover, his traditional IRA account balance is $20,000:

  • $10,000 of federal deductible contributions but subject to tax for Massachusetts purposes; and
  • $10,000 of accumulated earnings or appreciation.

If the taxpayer converts the traditional IRA to a Roth IRA, the $20,000 is included in federal gross income for federal income tax purposes. Unless the taxpayer elects otherwise, $10,000 of the income resulting from the conversion is included in gross income in 2011, and $10,000 is included in 2012. As an alternative, the taxpayer may elect to include the entire $20,000 in gross income in 2010.

Impact of Rollover Provision Completed in 2010 - Massachusetts Adjustments:
Amounts in traditional IRAs previously subject to Massachusetts personal income tax will not be subject to tax when the IRA is converted to a Roth IRA. In this case, the Massachusetts previously taxed contributions of $10,000 will not be taxable in Massachusetts; the $10,000 of earnings and appreciation is ordinary income and will be included in Massachusetts gross income. Unless the taxpayer has made a federal election, $5,000 of the income resulting from the conversion is included in Massachusetts gross income in 2011, and $5,000 is included in 2012. However, if the taxpayer makes the federal election to include the entire federal amount in gross income in 2010, the taxpayer must include the entire Massachusetts amount of $10,000 in gross income in 2010

Nonresident who Moves to Massachusetts:
There is no adjustment for previously taxed contributions under Section 2(a)(2)(F) to a nonresident moving into Massachusetts since the contributions were never taxed by Massachusetts. See LR 82-124 below, Distribution to Beneficiary of an IRA.

Qualification for Amount of Taxable Roth IRA Conversion Distribution is determined by completing the following worksheets:

  • for residents, the Schedule X, Line 2 Worksheet - Taxable IRA/Keogh Plan and Roth IRA Distributions;
  • for part-year residents who are taxed on Roth IRA conversion distributions received as a Massachusetts resident, Schedule X, Line 2 Worksheet - Taxable IRA/Keogh Plan and Roth IRA Distributions.

Nonresidents are not taxed on Roth IRA conversion distributions.

IRA/Keogh Plan and Roth IRA Conversion Distributions Worksheet Example

Form 1099 Reporting of Rollovers:
If a taxpayer rolls over an IRA from one bank to another, the bank will issue a Form 1099 showing the entire distribution. The taxpayer must then rely on his or her own records to determine adjustments for previously taxed contributions.

For tax years beginning on or after January 1, 2006, the maximum total yearly contribution that may be made by an individual to all IRAs, Traditional and Roth, not counting rollover contributions is $5,000 for individuals who are at least 50 years of age by the end of the tax year who are permitted to make "catch-up" contributions. 

Traditional IRA vs. Roth IRA - Massachusetts vs. Federal Provisions

Federal Provisions:
TransactionTraditional IRARoth IRA
Contributionsdeductible, certain Limitationsnondeductible
Income Earned in the Accountnot taxable until distributednot taxable
Rollover from Traditional IRA to Roth IRAnot taxable until distributedtaxable above federal previously taxed contributions
Distributionstaxable above federal previously taxed contributionsnot taxable if conditions met
 
Massachusetts Provisions:
TransactionTraditional IRARoth IRA
Contributionsnondeductiblenondeductible
Income Earned in the Accountnot taxable until distributednot taxable
Rollover from Traditional IRA to Roth IRAnot taxable until distributedtaxable above Massachusetts previously taxed contributions
Distributionstaxable above Massachusetts previously taxed contributionsnot taxable if conditions are met

Keogh or HR 10 Plan

Keogh plans (also called HR-10 plans) are retirement plans that can only be set up by sole proprietors or partnerships (but not partners). The retirement plans are for those who earn self-employed income from personal services and have net earnings. If there is a net loss from self-employment, no contribution for oneself can be made for the year. Net earnings must be from personal services, not merely from investment.

Massachusetts follows the federal treatment for the following:

  • Contributions made by a self-employed individual to a Keogh or HR-10 plan are included in gross income. For federal purposes, an individual may claim either all or part of the contribution as a deduction on U.S. Form 1040 provided certain criteria are met. Massachusetts, however, does not allow a deduction for such contributions;
  • Income earned on the contributions while in the Keogh or HR 10 Plan is excluded from gross income;
  • Distributions made to an Individual from a Keogh or HR-10 plan are included in gross income. For Massachusetts purposes however, distributions made are excluded from gross income to the extent that such distributions represent Massachusetts previously taxed contributions.

Taxpayer Advice in Massachusetts:
Contributions to Keogh plans, similar to IRAs, are made with after tax dollars and the distributions are taxable to Massachusetts only after previously taxed contributions have been recovered. Taxpayers with a Keogh or HR-10 plan should keep a record of all contributions made that were included in Massachusetts gross income. Records would include: statements from banks or other financial institutions to verify contributions and distributions to date, including source of any rollover; copies of U.S. Form 1099-R - Distributions from Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts.

Note that pre-1975 contributions were deductible under Massachusetts law and therefore have not previously been taxed.

Qualification for Amount of Taxable Keogh Distribution is determined by completing the following worksheets:

  • for residents, the Schedule X, Line 2 Worksheet - Taxable IRA/Keogh Plan and Roth IRA Distributions;
  • for part-year residents who are taxed on IRA distributions received as a Massachusetts resident, Schedule X, Line 2 Worksheet - Taxable IRA/Keogh Plan and Roth IRA Distributions.
    Nonresidents are not taxed on Keogh distributions.

IRA/Keogh Plan and Roth IRA Conversion Distributions Worksheet Example

Partners in a Partnership:
Limited partners are not allowed to set up a Keogh plan unless they receive guaranteed payments for services that are treated as earnings from self-employment. An individual partner may not set up a Keogh; it must be done by the partnership.

Savings Incentive Match Plan for Employees - SIMPLE Account

 SIMPLEs are salary reduction retirement plans that qualifying small employers may offer their employees. Only employers who in the preceding year had no more than 100 employees with compensation of at least $5,000 may set up these plans. Employers may not maintain any other employer-sponsored retirement plans, except for collectively bargained employees. SIMPLE plans can be set up as either an IRA or I.R.C. § 401(k).

Massachusetts follows the federal treatment for the following:

  • "Elective employer contributions" to a SIMPLE are excluded from the employee's gross income in the year contributed. Eligible employees may contribute by electing to have the employer contribute on their behalf a percentage of their salaries;
  • Employer matching contributions to a SIMPLE are excluded from the employee's gross income in the year contributed. Employer must match the above contributions or choose to make the non-elective contributions as described below;
  • Employer "Nonelective" contributions are excluded from the employee's gross income in the year contributed. The employer may choose to make "non-elective" contributions on behalf of all eligible employees equaling a percentage of such employees' salaries;

2012 exclusion amounts for elective deferrals, including "catch-up" contributions - see table

  • Income earned on the contributions while in the SIMPLE account is excluded from gross income;
  • Distributions made to the retiree from the SIMPLE are excluded from gross income to the extent that such distributions represent Massachusetts previously taxed contributions. Distributions in excess of Massachusetts previously taxed contributions prior to January 1, 1998 are taxable.

Special "Catch-Up" Provision:
A limited "catch-up" provision allows employees in the last three years before reaching normal retirement age to defer larger amounts, provided that the full amount has not been used in prior years.

Taxpayer Advice for Massachusetts:
Taxpayers with a SIMPLE established prior to 1998 should keep a record of all contributions made prior to January 1, 1998 that were included in Massachusetts gross income.

Federal Treatment of Self-Employed Taxpayer's Deduction for SIMPLE Contributions:
Self-employed individuals may make deductible contributions to their own SIMPLE accounts. Since all contributions on behalf of self-employed individuals are treated as "employer" contributions, such contributions to SIMPLE plans of self-employed individuals must be claimed as an adjustment to federal gross income on Line 29 of U.S. Form 1040, Keogh and self-employed SEP and SIMPLE plans. Contributions that self-employed individuals pay on behalf of their employees are allowable Schedule C deductions.

Massachusetts Treatment of Self-Employed Taxpayer's Deduction for SIMPLE Contributions:
Massachusetts allows employer deductions for contributions to employee plans. However, while an employer taxable under Chapter 62 (i.e., a sole proprietorship) may take deductions for contributions to retirement plans on behalf of its employees, the law expressly prohibits the deductions allowed by I.R.C. § 404 to the extent attributable to contributions made on behalf of self-employed individuals. Therefore, contributions made by self-employed individuals to their own plans may not be deducted.

Self-Employed Individual's Deduction for SIMPLE Contributions - Example,

Schedule C Employer with Two Employees: 

Employer contributes to SIMPLE on behalf of the two employees:

  • "Elective employer contributions";
  • Employer matching contributions.

Employer contributes to SIMPLE on his own behalf:

  • "Elective employer contributions";
  • Employer matching contributions.

Federal and Massachusetts tax treatment to employees:

  • Both the "elective employer contributions" and the employer matching contributions are excluded from the employee's gross income in the year contributed.

Federal tax treatment to Schedule C employer:

  • both the "elective employer contributions" and the employer matching contributions made on behalf of the employees may be deducted from gross income on Schedule C per I.R.C. § 404; and
  • both the "elective employer contributions" and the employer matching contributions made on behalf of the employer qualify as a self-employed individual contribution to a qualified retirement plan and may be deducted on Line 29 of the U.S. Form 1040 per I.R.C. § 219.

Massachusetts tax treatment to Schedule C employer:

  • both the "elective employer contributions" and the employer matching contributions made on behalf of the employees may be deducted from gross income on Schedule C per I.R.C. § 404; and
  • both the "elective employer contributions" and the employer matching contributions made on behalf of the employer may not be deducted per Chapter 62, Section 2(d)(1)(D).

Simplified Employee Pension Plan - SEP or SEP IRA

 Simplified employee pension plans (SEPs) are IRA type plans set up by an employer, rather than the employee, into which employers make contributions to IRAs on behalf of their employees. This plan is a vehicle for employees to be able to contribute more money to their IRAs than is allowed under traditional IRA rules. The IRA of each participating employee typically takes the form of a separate account in a group IRA. Salary-reduction contributions may be allowed to the following plans of small employers:

  • stock bonus;
  • tax deferral for the employee for the employer's contributions and earnings; and
  • tax exemption for the fund established to provide benefits.

Massachusetts follows the federal treatment for the following:

  • Contributions made by an employer to an employee's SEP are excluded from the employee's gross income in the year contributed;

    2012 exclusion amounts for elective deferrals, including "catch-up" contributions - see table
  • Income earned on the contributions while in the SEP account is excluded from gross income;
  • Distributions made to the retiree from the SEP are excluded from gross income to the extent that such distributions represent Massachusetts previously taxed contributions. Distributions in excess of Massachusetts previously taxed contributions prior to January 1, 1988 are taxable.

Special "Catch-Up" Provision:
A limited "catch-up" provision allows employees in the last three years before reaching normal retirement age to defer larger amounts, provided that the full amount has not been used in prior years.

Advice for Massachusetts Taxpayers:
Taxpayers with SEPs established prior to 1988 should keep records of all contributions made prior to January 1, 1988 that were included in Massachusetts gross income.

Where to Report on Original Tax Return; What to Enclose:

 Keogh Plans, Traditional IRAs, Roth IRA Conversions

Documentation to Submit with Abatement/Amended Tax Return:

  • Copy of U.S. Form(s) W-2 - Wage and Tax Statement for exclusions of contributions;
  • Copy of U.S. Form 1099-R - Distributions From Pensions, Annuities, Retirement or Profit Sharing Plans, IRAs, Insurance Contracts.
  • Statement from bank or other financial institution to verify contributions and distributions to date, including source of any rollover;
  • Federal Form 8606 - Nondeductible IRAs;
  • Massachusetts Form 1 or 1-NR/PY, Schedule X, Line 2 Worksheet - Taxable IRA/Keogh Plan and Roth IRA Distributions

For ineligible one-time rollover

  • Copy of IRS letter informing them of ineligibility for the rollover; and
  • Documentation from the financial institution that the contributions to the Roth IRA have been recharacterized back to a traditional IRA.

Massachusetts References:

401 Pensions

Bank Pensions

  • M.G.L Chapter 168, Section 74 et seq.
  • M.G.L. Chapter 170, Section 51 et seq.
  • M.G.L. Chapter 171, Section 31 et seq.
  • LR 81-101: Cooperative Banks Employee Pension Plan
  • LR 81-92: Savings Bank Employees Pension Plan
  • LR 81-53: Credit Union Employees Retirement Plans

Education Savings Account

Keogh or HR 10 Plan

  • M.G.L. Chapter 62, Sections 2(a), 2(a)(2)(F); 2(d)(1)(D)

Roth IRA

Traditional IRA Rollover (Conversion) to Roth IRA 

Traditional IRA

IRA Distributions for Charitable Purposes

SIMPLE, SEP or SEP IRA

Federal References

401 Pensions

  • I.R.C. §§ 401(a), (c)(1), (k); 402 (g)(3); 404,(D)
  • Treas. Reg. §§ 1.401(k)-1(a)(2)(i), 1(a)(6); 1.404(e)-1A(f)(1), (2); 414(v)
  • The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRAA)

Education Savings Account

  • I.R.C. § 530(a), (c), (d)(2)(A)

IRA Distributions for Charitable Purposes

  • The federal American Taxpayer Relief Act of 2012 (H.R. 8)
  • The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (P.L. 111-312)
  • The Emergency Economic Stabilization Act of 2008 (P.L. 110-343)

Roth and Traditional IRAs

  • I.R.C. §§ 408(a); 408A(a), (c), (c)(3)(B), (d)(2), (d)(3)(A)(i), (iii)

SIMPLE, SEP, SEP IRA

  • I.R.C. §§ 219; 401(k)(11)(B)(i)(I), (II), (ii); 402(h); 404(m); 408(k); 408(p)(2)(A)(i)(I), (iii), (B)