A Self-Directed SEP IRA—A Great Way for Business Owners and Their Employees to Save for Retirement

Published on November 6, 2014

SEP – Simplified Employee Pension

SEP stands for simplified employee pension; a SEP IRA is a truly simplified way for employers to make contributions towards their employees’ retirement. Self-employed individuals may open a SEP IRA to contribute to their retirement savings as well. If an employer decides to establish these retirement plans for workers, a SEP IRA (which is a Traditional IRA) must be set up for each employee and all employees must receive the same benefits (contribution percentage) under the plan. IRS Publication 560 has details about this or go to https://www.irs.gov/Retirement-Plans/Choosing-a-Retirement-Plan:-SEP.

Some simple but strictly held conditions of eligibility apply for SEP IRAs. Participating employees must be at least 21 years old, must have worked for the employer for a least three of the previous five years, and must have received at least $550 in compensation for the tax year (this will go up to $600 in 2015). Once those criteria are met, a formal written SEP agreement is executed and eligible employees are given relevant information about the plan. The employees control their accounts and the employer sends the contributions to the financial institution where the account is maintained. You can read more about setting up a SEP IRA here.

SEP IRA contributions

SEP IRA contributions are treated as part of a profit-sharing plan and employers may contribute up to 25 percent of the employee’s wages to his/her account (up to $52,000 in 2014 and $53,000 in 2015); the contribution amounts are flexible so they can change as seasonal cash flow or sales cycles fluctuate. Contribution limits for the self-employed are different and are based on net profit, so it’s a good idea to consult your accountant about this.

Contributions are deductible and will lower a taxpayer’s income tax liability in that contribution year. The funds are taxed at ordinary income tax rates when qualified withdrawals are taken after age 59 1/2 (as for Traditional IRAs).

Investing for Retirement in a SEP IRA

Funds in a SEP IRA may be invested in the same way as they are in the case of a Traditional or Roth IRA. In the case of a self-directed SEP IRA, those tax-advantaged funds could be growing more via the alternative assets allowed in self-directed retirement plans.

As with all self-directed retirement accounts, there are many more investment options available to owners of a SEP IRA. Many individuals already know and understand various alternative assets such as real estate, commodities, precious metals, and private placements—why not include them in a self-directed SEP IRA and build a more diverse retirement portfolio? Whether it’s the business owner/self-employed individual seeking to make alternative investments or savvy employees who might already be investing in these assets outside of their existing IRAs, there are more opportunities to build up retirement savings through self-direction.

To learn more or to get started with a SEP IRA for you and/or your employees, contact our self-directed IRA specialists at Next Generation Trust Services: (888) 857-8058 or Info@NextGenerationTrust.com.


Read more about SEP IRAs here.

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