What is a SEP IRA? Are you Ready for One?

Published on January 16, 2014

SEP stands for Simplified Employee Pension plan; this type of retirement plan allows self-employed individuals and small-business owners to make contributions toward their retirement and that of their employees (if applicable) with some excellent tax advantages. A separate account must be set up for each employee. These plans are typically offered in companies with 25 employees or less.

SEPs are considered “simplified” plans because they are not as complex in terms of reporting requirements as qualified plans (such as 401ks). Contributions are tax deductible, and the accounts earn tax-free income until that money is withdrawn. As with all types of retirement plans, a SEP IRA may be self-directed.

How to Determine if a SEP IRA is Right for You


A.    SEP IRAs have high contribution limits. A SEP IRA is a great option for self-employed business owners who want to contribute the highest amounts possible toward their retirement and qualify for the highest annual tax deductions. In 2013, the annual maximum contribution was $51,000 (beyond that, we get into 401k territory). This is far higher than the contribution limit allowed in a Traditional or Roth IRA.

B.    Any kind of employer (business entity) can establish a SEP—corporation, partnership, LLC, sole practitioner; for profit or nonprofit. There just needs to be one employee (in the case of a sole proprietorship, the employer and employee are the same person) and the minimum requirements are easy to meet: participants must be at least 21 years old, have worked for the business during three of the past five years, and have earned a minimum of $500 in compensation. Spouses and children of the business owner who are employed by the company and meet the requirements may also participate and open their own SEP IRAs.

C.    They allow small companies to offer a strong benefit. SEPs are popular with owners of small companies because they are easy to administer and allow them to offer some kind of matching program (if they choose to) on a small scale. Employers may contribute up to 25 percent of the employee’s total annual compensation, up to the allowed amount.

Depending on your personal or company financial picture, your financial or tax advisor can help you determine if a SEP IRA makes sense for you, and discuss the tax advantages to employers and employees of these plans.

Self-Directed SEP IRAs

If you are already investing in certain alternative assets outside of an existing IRA, you might want to open a self-directed SEP IRA.

With a self-directed SEP IRA the employee (or business owner, for his/her own account) directs the types of investments to be made. Like all self-directed retirement plans, a self-directed SEP IRA must be held and managed by a third-party administrator, who will execute the transactions for the account holder and administer all the paperwork, record-keeping, and filing correctly.

Self-directed SEP IRAs allow for a broad range of traditional and nontraditional investments to help savvy investors build more eclectic retirement portfolios—and in many cases, build retirement wealth more aggressively than with stocks, bonds, and mutual funds. Whether the participant is the business owner or employee, the SEP IRA provides an excellent vehicle for building retirement wealth through investments in alternative assets. These include real estate, commodities, hedge funds, precious metals, private placements, unsecured loans, and so much more.


To set up your self-directed SEP IRA, you must have a formally written SEP agreement on file (yes, even for yourself). This form is a Simplified Employee Pension-Individual Retirement Accounts Contribution Agreement, known by the IRS as Form 5305-SEP.

When setting up the SEP, the employer must give each eligible employee certain information about the plan (the IRS or financial institution will have those instructions). Finally, a distinct and separate account must be set up for each eligible employee. For solo entrepreneurs or practitioners who have no employees or are only setting up a SEP for themselves, there is just one SEP IRA to set up.


The professionals at Next Generation Trust Services can help you get started or answer any questions you have about these types of retirement plans. You can find all the forms you need to open a self-directed plan or to roll funds over from an existing account at: https://www.nextgenerationtrust.com/open-an-account/open-a-sep/.

Or give us a call at (888) 857-5058 to discuss your self-directed SEP IRA or other self-directed retirement plan needs.

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