A SEP IRA (Simplified Employee Pension) is an individual retirement plan for business owners with or without employees. Employees can contribute up to $61,000 for 2022 or $66,000 for 2023. Contributions are made with pre-tax income and are tax deductible and tax deferred until you take qualified distributions in retirement.
With a regular SEP IRA, your investment options are limited to traditional assets like stocks, bonds, mutual funds, and ETFs. If you want to invest in alternative assets like crypto, real estate, precious metals, and private equity, you’ll need to open a self-directed SEP IRA.
What is a self-directed SEP IRA?
A self-directed SEP IRA works the exact same way as a regular SEP IRA. It has the same contribution limits, eligibility rules, withdrawal rules, deadlines, and tax benefits.
The main difference is in your investment options. A regular SEP IRA can only invest in traditional assets like stocks, bonds, mutual funds, and ETFs. A self-directed SEP IRA opens the door to alternative assets like crypto, real estate, and private equity.
Also read: SEP IRA vs Roth IRA vs Traditional IRA
How does a self-directed SEP IRA work?
A self-directed SEP IRA works the same way as a regular SEP IRA.
As an employer, you can make contributions to your account, up to 25% of compensation (20% if the business is not incorporated) up to a maximum of $61,000 for 2022 and up to $66,000 for 2023. Contributions are made with pre-tax income, giving you a tax deduction for years you contribute.
Unlike a SIMPLE IRA, contributions are not mandatory. Employers can change how much they contribute each year, and even decide not to contribute at all, if they have a down year.
Equal percentage contributions
If you have a SEP IRA at your company, and you have eligible employees, you’re required to make equal percentage contributions to their accounts whenever you contribute to your own SEP IRA.
For example, if you decide to contribute 10% of your compensation to your SEP IRA this year, you also have to contribute 10% of every eligible employee’s compensation into their own SEP IRAs. Employees cannot contribute directly into a SEP IRA; they can only receive contributions from their employer.
Who qualifies for a self-directed SEP IRA?
As mentioned earlier, the eligibility rules for a self-directed SEP IRA is the same as a regular SEP IRA. Any business owner or self-employed individual, with or without employees, can open a SEP IRA. However, if you don’t have any employees, you’re likely eligible for a solo 401k, which can offer more tax benefits than a SEP IRA.
What counts as an eligible employee?
Any employee who is over 21 years of age, has worked for you for at least 3 out of the last 5 years, and has earned at least $650 for 2022 and $750 for 2023.
What can you invest in with a self-directed SEP IRA?
A self-directed SEP IRA can allow you to invest in alternative assets like crypto, real estate, precious metals, and private equity.
However, not all self-directed SEP IRAs offer the same investment options. Many self-directed SEP IRAs only offer access to one or two specific alternative assets (for example, a crypto self-directed SEP IRA). Make sure that you choose a custodian for your self-directed SEP IRA that allows you to purchase assets that you want to invest in.
How to open a self-directed SEP IRA
As long as you’re eligible, you can open a self-directed SEP IRA with any custodian of your choosing. Opening an account is fairly simple, doesn’t take very long, and only requires a few forms.
Once you open your account, you can rollover funds from another retirement account (like a regular traditional IRA, Roth IRA, or a regular SEP IRA) or make contributions for the tax year. Once your account is funded, you can start making investments into the alternative assets that your custodian offers.
The contribution limit for a self-directed SEP IRA is the same as a regular SEP IRA.
You can contribute up to 25% of your compensation, up to the contribution limit of $61,000 for 2022 and up to $66,000 for 2023. If you’re self-employed and your business is not incorporated, you can only contribute 20% of your compensation rather than 25%.
You can start to take qualified distributions from your self-directed SEP IRA once you reach the age of 59½. Qualified distributions have no penalties, but you will still have to pay regular income taxes on your withdrawals.
If you make a withdrawal before the age of 59½, it will be subject to a 10% early distribution penalty plus income taxes.
Also read: What Is a Self-Directed IRA (SDIRA)?