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What is a Self-Directed SEP IRA? And 4 Other Pressing Questions

As the contribution deadline for those employers who have filed an extension is on October 15, we are addressing a few frequently asked questions to help you determine if a Simplified Employee Pension (SEP) Individual Retirement Account (IRA), better known as the SEP IRA, is right for you.   

What is a Self-Directed SEP IRA? 

According to the IRS, a SEP IRA allows any employer to establish a retirement account and make contributions on behalf of eligible employees, even if you are self-employed and setting up and contributing to a SEP IRA for yourself. SEP IRAs are a great retirement plan option if you are self-employed or a small business owner with less than 100 employees.  

self-directed SEP IRA is unique in that it allows you to look beyond stocks and bonds and invest in alternative assets, such as real estate, precious metals, and more. 

What are the advantages of a SEP IRA? 

SEP IRAs are great for self-employed individuals and employers who wish to offer retirement contributions to their employees. Here are some advantages: 

  • Easy to set up and low maintenance.  All you need to do to set up a SEP IRA is create a formal written agreement or fill out IRS form 5305-SEP 
  • Generous tax-deductible contributions. You can contribute more to a SEP IRA than a traditional IRA at a maximum of 25% of your or your employees’ income or $58,000 (whichever is lower). Contributions are generally tax deductible for the business.  
  • Flexible contribution amounts.  As long as you contribute the same amount to all your employees, you can increase or decrease the amount of your contributions based on business performance. 
  • Various investment options. With a self-directed account, SEP IRA investment options include real estate, precious metals, private lending, livestock, air and space, and so much more. You can also roll many other types of retirement accounts into a SEP IRA to further your investing power.  

What is the difference between a SEP IRA vs. Roth IRA? 

With a SEP IRA, contributions are tax deductible and made by the employer at a maximum of 25% of salary or $58,000, whichever is lower. You will need to pay income tax on distributions, but generally at retirement age when you are in a lower tax bracket. 

With Roth IRAs, on the other hand, the reverse is true. You can make your own contributions, but they are not tax deductible. As a result, you will not need to pay income tax when you withdraw your money. The contribution limit for Roth IRAs, however, is drastically lower at $6,000 for individuals below 50 and $7,000 for individuals 50 and above. 

What is the difference between a SEP IRA and SIMPLE IRA? 

 SIMPLE IRA stands for Savings Incentive Match Plan for Employees Individual Retirement Accounts and allows both the employer and employee to make contributions to the retirement account with a contribution limit of $13,500 (with a catch-up contribution limit of $3,000). SIMPLE IRAs generally work for companies under 100 people, with the employer matching up to 3% of what the employee contributes. 

In comparison, only the employer can make contributions to a SEP IRA, but the contributions are tax deductible with a much higher limit of 25% of salary or $58,000, whichever is lower. SEP IRAs are also for self-employed individuals and are typically set up for any business size.  

Who is eligible for a SEP IRA? 

If you are self-employed, a business owner, or are earning freelance income from services, you are eligible to open a SEP IRA. As a freelancer, you can make contributions as you see fit. As a business owner, you can increase and decrease contributions as long as you contribute the same amount to yourself and all your employees. 

Learn More About SEP IRAs – Download Our Comprehensive Guide 

SEP IRAs are so easy to set up and maintain, which is why it’s a great choice for self-employed individuals or business owners who have a small team that they want to take care of. The varied investment options available for self-directed SEP IRA account holders also make the retirement account attractive for individuals who want a more varied or diverse financial profile. 

If you want to learn more about SEP IRAs, download our comprehensive guide. If you’re looking into opening an account, let us help you make your account opening and maintenance as easy as possible. 

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