Self-Employed IRA: Look no Further than the SEP

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Most employer retirement plans are structured with both the employee and the employers’ needs in mind. But what if the employee and employer are one and the same? Many New Direction clients are interested in knowing what the best self-directed IRA plan may be for self-employed individuals. Although every retirement investor’s goals look different, a SEP IRA can be a suitable self-employed IRA option for our clients.


The IRS seems to have kept self-employed individuals in mind when formulating the rules and benefits of the SEP IRA. For starters, self-employed business owners pay no taxes on the investment earnings of their SEP IRA. On top of that, SEP IRAs have notoriously low administrative costs compared to other IRA plans, which can greatly benefit small businesses (Department of Labor). If you’re a small-business owner with a few dozen employees, you’ll probably need to budget for at least $1,500 to $3,000 to get a 401(k) up and running (Marvin Wealth Management). At New Direction, clients can open an SEP for as little as $50.

The SEP IRA offers significantly higher contribution limits than other individual plans, such as the Traditional or Roth IRA. For instance, in 2016, the maximum contribution limit for SEP account holders is $53,000. By contrast, the 2016 Traditional IRA maximum contribution limit for individuals under 50 is only $5,500 (and $6,500 for individuals over 50). This huge increase in contribution limits allows the retirement savings of self-employed individuals to catch up with the savings of tax payers whose’ employers contribute to their employees’ retirement accounts every year.


SEP IRA owners get to choose the percentage of contribution to their account (and the accounts of any other employees) for any given year. This percentage can range between 0-25% of earned income. So, if a self-employed individual doesn’t want to make a contribution to their SEP in any given year, they don’t have to. The only requirement is that the contribution percentage for any given year must be the same for all employees, should there be more than one.


A few stipulations do exist for SEP contributions: for one, employee elective deferrals and catch-up contributions are not permitted in SEP plans. Only employer contributions are allowed in these instances.


Additionally, calculating SEP IRA contributions for self-employed individuals can be tricky, as the salary of the account holder is calculated after the contribution is made. Not including contribution limits, the calculation is 18.587045% (approximately 18.6%) of the employer’s net profit (Investopedia). You can enlist the expertise of a tax professional to  assist you in the calculation of  the allowable amount, based on your self-employed income for that year.


When you open an SEP IRA with a self-directed IRA provider, you can direct your account to invest in assets that lie outside of the stock market, such as real estate, precious metals, private equity, and more. To understand more about your retirement options as a self-employed individual, feel free to call or email New Direction IRA today. Happy investing!

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