What is a Self-Directed SEP IRA?

A Self-Directed SEP IRA, or a Self-Directed Simplified Employee Pension IRA, is a unique retirement account built for small business owners. Featuring high contribution limits and plenty of flexibility for investors, they can be ideal alternatives for 401(k) plans. However, there are some specific rules and quirks you'll want to keep in mind if you're considering a SEP IRA. Let's explore.

What Makes a Self-Directed SEP IRA Unique?

One of the key benefits of a Self-Directed SEP IRA is its high contribution limits. While other retirement accounts tend to be a tad more restrictive, the SEP IRA allows business owners to contribute much more to their retirement than most traditional IRA plans.

The "self-directed" aspect of the Self-Directed SEP IRA also means you have complete control over your investments. You're not limited to traditional stocks, bonds, and mutual funds—the ones you might find in typical retirement accounts. Instead, you're free. You can invest in a wide variety of assets such as real estate, private equity, precious metals, and more. This means you’ll have the choice to diversify your portfolio in ways that aren't possible with other retirement accounts.

The Eligibility Requirements

Before setting up a SEP IRA, it's important to understand the eligibility requirements. While these accounts are typically designed for business owners, they can also include employees, as long as they meet certain criteria.

For the business owner, the SEP IRA offers a lot of flexibility. Unlike some retirement plans that require annual testing, there's no such requirement for a Self-Directed SEP IRA. This makes it easier to maintain and manage, especially if you have a small team or are even a solo entrepreneur.

Contribution Flexibility and Other Rules

While the contribution limits are high, there are some restrictions to keep in mind when using a Self-Directed SEP IRA. For one, contributions to the account are only allowed to come from the business’s earnings. However, the ability to contribute a significant portion of your earnings can help you build wealth more quickly than with other retirement options.

Another important consideration? The fact that the contributions you make to your Self-Directed SEP IRA are tax-deductible for your business. This reduces the taxable income for the business and can lead to significant tax savings. This is one reason why a SEP IRA is such an ideal option for many small business owners.

However, one downside to consider is that while you’re able to control your investments, your business is responsible for contributing to employee accounts. You have to contribute the same percentage for each employee, which means you need to ensure that the contributions remain fair and consistent. (If you run a solo business, this makes SEP IRAs easy to comply with.)

Benefits of the Self-Directed SEP IRA for Business Owners

Beyond the tax advantages and high contribution limits, the Self-Directed SEP IRA offers a range of benefits that can work well for business owners. For starters, it provides an excellent way to save for retirement while enjoying the tax benefits associated with business contributions. Your ability to invest in alternative assets means you can align your retirement savings with your business goals, even if you don’t want to buy stocks and bonds. Since you have the freedom to control the investments in the account, you can also take advantage of growth opportunities that might be out of reach with other retirement plans. In short, it’s the kind of flexibility that you don’t typically experience when you’re investing in retirement accounts, which is part of what makes it so attractive.

Interested in learning more? Reach out to us here by dialing 866-7500-IRA.