IRA Distribution to Fund SEP IRA

Submitted by John Going on Mon, 2020-04-06 18:28

I have a client who has a large IRA (not SEP). Each year he funds his SEP-IRA after we determine his net self-employment income. With COVID, he is short on funds but still wants to fund his SEP. He is asking:

1. Can I take a distribution from my IRA (that will be taxable on my 2020 return) and use the funds to fund my SEP IRA?
2. If so, can I spread the tax over the next 3 years under the CARES act provision since I have been adversely affected by COVID?

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Permalink Submitted by Alan - IRA critic on Mon, 2020-04-06 18:47

As long as he qualifies for a CV distribution, he can use the funds as he wishes, including making a new SEP contribution. When he reports the TIRA distribution on Form 8915 (or new form IRS specifies) he can report 1/3 the income each year and also has up to 3 years to roll it back under the CARES Act. Further, the distribution will be penalty free.

Permalink Submitted by William Tuttle on Mon, 2020-04-06 18:51

I will leave the answering of the questions to Alan. At a minimum consider filiing an extension.
The client has until 7/15 to file for an extension and have until 10/15 to make the SEP IRA contribution. Regardless of the other choices to be made, in these uncertain times filing for the extension is a wise choice. It doesn’t matter if it isn’t used.

Permalink Submitted by John Going on Mon, 2020-04-06 18:59

Thanks Alan and Spiritrider! For my general knowledge – If we did not have COVID, can someone take a distribution from a TIRA to fund a SEP IRA (understand they will need to pay normal taxes on the distribution)?

Permalink Submitted by Alan - IRA critic on Mon, 2020-04-06 20:54

There are no tracing requirements and this is not a rollover, so the cash to make the SEP contribution can come from anywhere including a loan.

Permalink Submitted by John Going on Mon, 2020-04-06 21:05

Your responses are always very helpful!