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Self Directed SEP IRA

Updated on July 1, 2009

Self Directed SEP IRA – Is it Right for You?

A self directed SEP IRA or Simplified Employee Pension Individual Retirement Account is an assortment of IRAs available as savings plan for taxpayers in the United States. This type of retirement savings option is generally adopted and implemented by business or company owners to grant retirement benefits for themselves as well as their respective employees. A good thing about SEP IRA is that there are no considerable administration and management costs for self-employed people or independent contractors with no employees. 

If you are self-employed and you have employees or personnel, you must make sure that all of them will receive equal benefits under the SEP retirement account. Because SEP retirement vehicles are considered as Individual Retirement Accounts (IRAs), the contributed funds may be invested the same way as other IRA accounts are turned as assets.

Self Directed SEP IRA Requirements

If you want to gain knowledge of a self directed SEP IRA, you can look for detailed information about this account in “IRS Pub 560”. You are eligible to have a SEP account if you fall under the following conditions: you are at least 21 years old, in the previous five years you have worked for your employer for at least three consecutive years, and you have an income of at least $500 in each tax year.

The contributed funds to SEP IRA are taxed at normal tax rates when you make withdrawals or distributions after you become 59 ½ years of age, which is the same rule that applies to traditional IRAs. All contributions in your SEP retirement account are considered deductible – meaning your income tax liability will be reduced in the current tax year.

For additional Roth IRA advice and requirements, you may need to consult with a financial or retirement planner.

SEP IRA Contribution Limits

You must understand that the contributions to a SEP IRA are measured as a part of a profit-sharing retirement account. As an employee, your employer can make a payment to your SEP account of up to 25% of your wages. For instance, if you are earning $20,000, your employer may add funds if you are investing for retirement into your account of not more than $5,000. The yearly contributions to your SEP IRA must not go beyond 25% of your yearly compensation. Employer contribution limits to SEP IRA for the year 2009 is up to $49,000.

As a self-employed individual, you should take some time to gain knowledge of your contribution limits because the rules for them appear to be more complicated. The computation about your contribution restrictions can be found in the IRS Pub 560, in Section 5 – “Table and Worksheets for the Self-Employed”. You should particularly read the “Deduction Worksheet for Self-Employed” segment, wherein you need to familiarize yourself with the two issues involved known as the “Reduced Rate” and the “FICA Tax”.

Self Directed SEP IRA Options

A self directed SEP IRA can be an efficient retirement savings option for you if you are: a sole property owner, self-employed, independent contractor, owner of a corporation, proprietor of an S corporation or a partner. This self directed IRA account plan will also best suit you if: your business does not pay taxes on your investment profits and earnings, you don’t want to make contributions every year, and you like a retirement account that exhibits low administrative costs. As for self directed investment choices, you can put your funds in various conventional and nonconventional assets such as LLCs, notes, stocks, mutual funds, bonds, and even in the real estate market.


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    • JosephRanseth profile image

      JosephRanseth 7 years ago

      Great hub!

      Being Canadian, I don't have an IRA, but I do write about self-directed investing within the Canadian structures of RRSP's and TFSA's. (Registered Retirement Savings Plans and Tax Free Savings Accounts)

      Thanks for all the great content.