self directed sep ira

What is a Self-Directed SEP IRA?

Whether you’re a small business owner with a dozen or so employees or you’re the sole employee of your business, you could take advantage of the unique benefits a self-directed SEP IRA has to offer. Employers who want to set aside retirement funds for themselves and their employees can do so in a self-directed Simplified Employee Pension (SEP) IRA, making tax-deductible contributions of up to 25% of an employee’s salary (subject to certain limitations).

SEP IRAs are a great option for smaller businesses who don’t have the means to establish a more complex retirement plan like a 401(k) because SEP IRAs don’t have the same start-up or operating costs and set-up is relatively easy.

How do Self-Directed SEP IRAs Work?

An employer will choose a trustee to hold all the employees’ retirement plan assets. There are many choices for Self-Directed SEP IRA trustees, so it’s important to fully assess a provider ahead of time. Qualifications like available investment options, ease of set-up, administrative costs, and customer service can all play a big part in determining if a provider will be a good fit.

Once a trustee is chosen, an employer will set up a SEP IRA for each eligible employee. Employees are eligible if they have reached age 21, have worked for the employer in at least three of the previous five years, and have received at least $600 in compensation during the year. However, an employer can set less restrictive eligibility requirements if it chooses. Every eligible employee must have a SEP IRA established for them.

Once a SEP IRA is established, an employer can start making annual contributions. While employers choose the SEP IRA provider, it’s the employees themselves who make their own investment decisions. Employees create their investment portfolios by choosing from the investment options made available by the trustee. With a self-directed SEP IRA, the available options can include a number of alternative investments in addition to traditional stocks and mutual funds. The employee is always 100% vested in their SEP IRA and can choose to make changes to their portfolio or withdraw funds (subject to taxes and penalties if applicable), although only the employer can make contributions.

The Benefits of Self-Directed SEP IRAs

SEP IRAs are a popular choice for small business owners who want to build retirement nest eggs for themselves and their employees. Furthermore, with the expanded investment options of a Self-Directed SEP IRA, business owners and their employees are discovering even more ways to realize their retirement dreams. The benefits of a Self-Directed SEP IRA include:

  • Flexible Annual Contributions – Employers can make larger contributions when times are good or choose to make no contributions in bad years, however the contribution rate must be the same for all employees.
  • High Contribution Limits – Employers can contribute up to 25% of an employee’s compensation or $56,000 (for 2019), whichever is less.
  • Tax-Deductible Contributions and Tax-Deferred Earnings – Employers can deduct contributions and any earnings on investments will not be taxed until distributed, so they can compound on a tax-deferred basis.
  • Easy Set-up and Administration – SEP IRAs are easy to establish and have low start-up and administrative costs as compared to other retirement plans such as 401(k) plans.
  • Alternative Investment Options – Employees make their own investment decisions – the employer only has to determine the amount of contribution – and can potentially choose from assets such as real estate, precious metals, and private equity investments.

It’s important for businesses of all sizes to attract and retain quality employees, and one way to do so is by offering competitive benefits. Providing a retirement plan is often a necessary part of doing business, and with a self-directed SEP IRA employers with small businesses have the opportunity to help their employees, and themselves, create a more comfortable, secure future.

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