SEP IRA

Self-Directed SEP IRA

A Simplified Employee Pension, or SEP IRA, is a low-cost, easy retirement plan for small businesses, typically with few employees. Employers can make contributions for themselves as well as their employees. But, the main attraction of this plan is that you can make larger annual contributions than you can in a traditional IRA. Sole proprietors, independent contractors, partners, corporations, and the self-employed can all take advantage of the benefits these accounts offer.

Self-directed SEP IRAs can help you maximize your retirement savings by investing in alternative assets. In other words, why limit yourself to the typical stocks, CDs, and mutual funds? Instead, take control and invest in things that you personally know and understand.

Features

  • Tax-deductible contributions of up to 25 percent of each employee’s compensation (to the maximum listed below)
  • More cost effective and involves less administration than a 401(k)
  • All employees receive the same benefits
  • Contributions can vary each year and you don’t have to make a contribution every year
  • Offers the business owner a sizable deduction on tax returns
  • Above all, a self-directed SEP IRA can invest in multifamily and commercial property, residential real estate, tax liens, precious metals, and much more

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Eligibility

  • For a sole proprietor, the business owner is immediately eligible
  • Employees must be at least 21 years of age and have worked for the employer for at least three of the last five years
  • Complete IRS 5305-SEP FORM to establish eligibility

Distributions

Distributions are income and subject to income tax. If you are under the age of 59 ½ at the time of a distribution, there is a 10-percent early withdrawal penalty. However, there are exceptions to this rule; consult the proper financial professional for more information.

Roth SEP IRA Contribution Provisions per the SECURE Act 2.0

Beginning with the 2023 tax year, the SECURE Act 2.0 passed at the end of December 2022 created what’s commonly being called the Roth SEP IRA. As stated in section 601 of the Act, this means that you are now able to designate Roth treatment to SEP contributions. The benefit is that the portion of your Roth contributions distributed in retirement are tax free. If you already own a SEP IRA, you don’t have to open a new account to begin making Roth contributions—you can designate them for your existing plan. Because this is a relatively new ruling, consult with your financial and/or tax advisor for details and IRS rules regarding Roth SEP IRAs.

Which Small Business Plan is Right for You?

Download our Chart to Compare the Features & Benefits of  Solo 401(k), SEP, & SIMPLE Plans

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Contribution Limits of a Self-Directed SEP IRA

SEP IRA 2023 2024
Annual Contribution (25% of compensation up to the maximum limit) Up to $66,000 Up to $69,000

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