SEP IRA to Spousal IRA

[WashingtonUser]

My spouse had a sole proprietorship that she closed in 2019.  She started a SEP IRA with that sole proprietorship and contributed to it for years before closing.    She had zero income from the sole proprietorship in 2020.   Can we contribute the SEP IRA as though it were a Spousal IRA for 2020 or 1) do we need to start a new IRA or 2) Convert the SEP into a Spousal IRA?  I appreciate any advice...

[MinhT1]

In order to contribute to a Spousal IRA for your spouse, you'll need to open a new IRA account. You cannot contribute the spousal amount to her SEP IRA which is subject to different rules.

You cannot convert her SEP IRA into a Spousal IRA.

[dmertz · Accepted solution]

Whether or not your wife can make her spousal IRA contribution to the SEP_IRA depends on whether or not the custodian permits it; doing so is not prohibited by the tax code.  However, doing so can be subject to error because by default the custodian will treat the contribution as a SEP contribution rather than as a regular contribution and must be explicitly informed that it's a regular contribution, not a SEP contribution.  Given the significant possibility of error, it's far better to make the regular contribution to a separate traditional IRA account even if the custodian permits regular contributions to be made to the SEP-IRA.

There is no such thing as a "spousal IRA." There is only a spousal IRA contribution, meaning that the spouse's contribution to their own IRA is supported by the compensation of the other spouse under the circumstances where a spousal IRA contribution is permitted.