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The Deemed or Sidecar IRAs -- Are you Ready?

    
The "Deemed IRA" (also called a "Sidecar IRA") was part of "The Economic Growth and Tax Reconciliation Act of 2001" (EGTRRA), although the concept has been around since the early 1980's. Basically, if your 401k plan adopts this provision of EGTRRA, for plan years beginning on or after January 1, 2003, a 401k plan may allow employees to make voluntary employee contributions to a "Deemed IRA" which is a separate account established under the plan.

IRA rules apply to all contributions to the Deemed IRA. For example, contributions to a Deemed Roth IRA will be after-tax. Contributions rules, including deductibility if applicable, for traditional and Roth IRAs apply to all contributions to Deemed IRAs, so income thresholds and phase-outs must be taken into consideration when making contributions.

During 2004 a 401k participant using a Deemed IRA arrangement will have the potential to contribute as much as $16,000 - $13,000 in pre-tax 401k contributions and $3,000 in Deemed IRA (traditional or Roth) contributions.

The distribution rules for the Deemed IRAs are also the same as traditional and Roth IRAs.

EGTRRA provided that the Deemed IRA and the contributions to it would be subject to the exclusive benefit and fiduciary rules of ERISA, but not ERISA's reporting and disclosure, participation, vesting, funding, and enforcement requirements applicable to the qualified retirement plan.

Assets of the 401k and any Deemed IRA can be commingled for investment purposes. However, the Deemed IRA contributions and earnings credited to them must be separately accounted for.

Plan sponsors interested in offering Deemed IRAs should contact their plan vendor and plan attorney before proceeding.

This is for educational purposes only. The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.


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