Can I save in my SEP IRA even though COVID hurt my income?


Q. I have a small business that’s just me and my wife. We didn’t qualify for unemployment and we’ve had no income since June, but we do have some savings. Can we still contribute to our SEP IRAs from our savings?
— Trying to plan

A. We’re sorry to hear business has been tough, but we’re glad to see you’re able to dip into your savings.

SEP IRA contributions are funded with employer money and are a function of the net profit that your business will have in the 2020 tax year, said Michael Cocco, a certified financial planner with Beacon Wealth Partners in Nutley.

From what you describe, it seems you operate as a sole proprietor or partnership.

The first thing you need to establish — with your tax advisor — is whether you will have a net profit or net loss for 2020 for your business, Cocco said.

“If there is a net loss, then unfortunately you would not be able to contribute to a SEP IRA for 2020, even if you have money in savings,” he said. “If you have a net profit in 2020, you would be able to contribute a percentage of that net profit as a SEP IRA contribution.”

The formula for how much a business owner can contribute to their SEP IRA can get complex, so please work with your tax or financial advisor to calculate that particular amount for you and your wife.

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This story was originally published on Dec. 25, 2020 presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.