What Is a Self-Directed SEP IRA for Business Owners and How Does It Work?

Do you want a retirement plan for your business that offers more flexibility, higher contribution limits, and other big benefits than you get with a traditional IRA? How about a plan that allows you to invest in things like real estate, private equity, and gold? If you’re a business owner with few employees, a self-directed SEP IRA may be the right choice for you.

In this article, we’ll explain what a self-directed SEP IRA is, how it works, the benefits, and the alternative investments allowed in the plan. We’ll cover contribution limits, eligibility requirements, and the rules that govern SEP IRAs—so you can make an informed decision about whether a self-directed SEP IRA is the right choice for your business.

Conventional SEP IRAs and self-directed plans are governed by the same IRS rules. Both plans offer the same benefits, as well.

What are the Benefits of a SEP IRA?

A Simplified Employee Pension (SEP) IRA is an attractive plan that allows An image with the words SEP IRA on it, illustrating the article's topic of the self-directed SEP IRA.businesses to take advantage of big retirement saving benefits. This plan only allows employer contributions—and they can make contributions for themselves and for their employees into SEP IRAs owned by their employees. Earnings grow in the account tax free—you won’t pay taxes until you take distributions in retirement.

Key benefits

    • Low-cost and easy to manage.
    • Allows much higher annual contributions than a Roth or traditional IRA.
    • Business owners can make contributions for themselves and for employees.
    • Employees receive the contribution percentage based on their earnings.
    • Employees’ contributions are vested immediately, and employees own 100 percent of contributions made on their behalf.
    • Annual contributions are not required; employers can contribute one year and not the next.
    • Contribution amounts can vary from year to year.
    • Business owners are eligible for deductions on tax returns.
    • Employee contributions up to 25 percent of employees’ compensation.
    • Employee contributions are tax deductible up to certain limits and can reduce individual annual income tax liability.
    • Earnings in a SEP IRA grow tax deferred until you take distributions in retirement.

What Is a Self-Directed SEP IRA?

A self-directed SEP IRA follows the same rules and offers the same benefits as a typical SEP plan, with two powerful features other SEP IRAs don’t allow:

    1. Self-directed SEP IRAs allow account owners to invest in a wide range of alternative investments besides stocks, bonds, and mutual funds.
    2. Account owners get to choose the investments for their plans instead of relying on a third-party to invest for them.

In other words, self-directed SEP IRAs offer more flexibility over your investment choices and greater control over your investment funds. As the plan owner, you make investing decisions based on your experience and knowledge of potential assets. You invest at your own pace. You can buy and sell assets when you choose. And the number of alternative investments you can choose from is tremendous.

What Are Alternative Investments?

Alternative investment are assets not typically found in conventional retirement accounts. So, you can invest in things besides stocks, bonds, and mutual funds. Self-directed SEP IRAs and other self-directed accounts open the door to assets you may never have imagined could help you build retirement wealth.

Examples of popular alternative investments:

This is a short list. There are thousands of other alternative assets, and they are quite literally at your fingertips when you self-direct your retirement plan. Your goal is to invest in what you personally know and understand and to capitalize on your knowledge and strengths to build tax-advantaged wealth for your retirement.

And high contribution limits for a SEP IRA make it easy to build investment capital quickly.

Contribution Limits for SEP IRAs

The contribution limits for self-directed SEP IRAs are much higher than they are for traditional and Roth IRAs, which makes SEP IRAs incredibly attractive for business owners like sole proprietors and partnerships. For example, in 2023, the most you can contribute to traditional and Roth IRAs is $6,500, plus an additional $1,000 if you’re aged 50 and older.

But the 2023 SEP IRA contribution limits for 2023 is the lesser of $66,000 or up to 25 percent of an employee’s annual compensation. There is no catch-up allowance, but the contribution ceiling is much higher. You can sock away more money in the account, which provides more capital to invest.

Additionally, thanks to the SECURE Act 2.0 that passed in December of 2022, you can now designate employee contributions as Roth if you decide to offer that feature.

Contributions must be made by the due date of your tax return (plus extensions).

If you are self-employed, your contributions cannot exceed your total net earnings from self-employment for that tax year.

Who Can Use a Self-Directed SEP IRA?

Businesses That Can Offer a SEP IRA

While any size business can offer a SEP IRA, below are the businesses that are eligible to use this plan:

    • Sole proprietors
    • Independent contractors
    • Partners
    • Corporations
    • Self-employed individuals

Employee Eligibility for SEP IRA Participation

For an employee to be eligible to participate in a SEP IRA, they must be 21 years or older and have worked for the sponsoring employer for at least 3 of the past 5 years. Additionally, you must meet the IRS income requirements for SEP IRA participation. 

Is a Self-Directed SEP IRA the Right Plan for You?

If you think a self-directed SEP IRA may be a good fit for your goals or if you have questions before deciding, give Advanta IRA a call today. Our team is happy to explain the power of self-direction in more detail and provide answers to your questions. We are the preferred self-directed IRA services provider, with nearly two decades in the industry and over $2.5 billion in client assets under management. Part of our mission is to empower people to take control of their retirement funds and investing decisions—so you can secure the financial future you desire when you retire.

About Scott Maurer

Scott Maurer, Vice President of Sales for Advanta IRA, is a recognized expert in the field of self-directed IRAs. With a law degree from the University of Florida and as a designated Certified IRA Services Professional (CISP), Scott’s keen understanding of rules and regulations fuels his passion to educate others on the power of investing in alternative assets using self-directed IRAs. Scott is a frequent guest on retirement and investing webinars and podcasts, and he has shown thousands of individuals how to achieve financial freedom by teaching them how to use their retirement funds to invest in private placements, real estate, private lending, and more. Throughout his two decades in the industry, he has watched numerous unique investments unfold, giving him great perspective of what is possible when people take control of their retirement funds and investing decisions.