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Key Takeaways
- Understand the Core Benefits: Both SEP IRAs and Self-Directed IRAs are simple to set up and offer tax-deferred growth, allowing you to pay taxes only on your income minus your contributions.
- Leverage Self-Directed Flexibility: A Self-Directed IRA provides “checkbook control,” allowing you to choose your own custodian and invest in alternative assets like real estate or precious metals to protect against market volatility.
- Maximize SEP IRA Contributions: SEP IRAs are ideal for higher savings, offering contribution limits up to 25% of net income (capped at $72,000), which can be nearly 10 times higher than traditional IRA limits
- Evaluate Employee Coverage: While SEP IRAs can be a powerful recruitment tool by extending coverage to employees, business owners must contribute the same percentage of compensation for all eligible staff if they contribute to their own account.
Most small business owners worry about financial security since they are not covered under an employer-sponsored retirement plan. However, with the improvements in IRA plans over the years, it has now become possible for small business owners to secure their life post-retirement with customized financial products.
Today, small business owners can invest in IRA plans that are designed to meet their unique requirements for the future, like
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Self-Directed IRAs
A self-directed IRA gives you a lot of freedom regarding your investment options. It lets you save money that can be used during retirement. With a self-directed IRA, you have complete checkbook control over how you select and manage your IRA investments.
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SEP IRAs
SEP IRA is very similar to self-directed IRA and has many of the same features, but the difference is that it is more specifically designed for small businesses, with similar but bigger advantages. These accounts do not have any administrative costs for individual employees, and contributions can be made in the same way as any other IRA.
As with traditional IRAs, both of these accounts do not permit you to make withdrawals until you reach the age of 59 ½ years, with early withdrawals being subject to income tax as well as a 10% IRS penalty tax. You also need to start making RMDs (Required Minimum Distributions) when you reach the age of 70 ½ years, the same as with any other tax-sheltered retirement plan.
SEP IRA vs Self Directed IRA
Self-Directed IRAs and SEP IRAs share many advantages but have small differences that you should take into account. Let’s look at the advantages these IRAs share, to understand how they work:
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They are Simple and Straightforward
Self-directed IRAs and SEP IRAs are some of the simplest types of IRA accounts you could invest in. To set them up, you just need to fill out the required paperwork and submit your contribution. They tend to work more like a normal bank account, with the only difference being that these are retirement accounts.
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Tax-Deferred Retirement Savings
If you are making contributions to either IRA, then you do not have to pay taxes on that amount. This means you can save money on taxes right from the start. For example, if your income is $20,000 and you contribute $2,000, then you only have to pay tax according to $18,000. The earnings from these plans are also tax-deferred, for maximum financial growth.
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You Can Pick your Custodian
Many employer-sponsored retirement plans include a specific trustee, which you cannot change. Due to the immense freedom afforded by a self-directed IRA or SEP IRA, you can choose your own custodian, picking one with the lowest fee or one whose services suit you the best.
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Freedom of Investment Selection
Self-directed IRAs and SEP IRAs allow you control over the type of trustee you want, which also opens up more investment options. You can select a custodian with investment selections based on your particular requirements. Moreover, with this freedom, you can invest according your needs while enjoying the same tax advantages as a traditional IRA offers.
In addition, there are some specific advantages that each plan offers, which we’ll look at below:
Specific Benefits of Self-Directed IRAs
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These Accounts are Highly Portable
A self-directed IRA is a completely “personal” oriented account, it stays with you where you want. You can transfer it between custodians and most importantly it can be rolled to employer-funded accounts if you choose to take a regular job instead of continuing with your business in the future.
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They Offer Greater Protection
Self-Directed IRAs let you user real estate or precious metals to protect your investment from inflation and economic fluctuation. These accounts are very diverse and protect you from market volatility as well as growing your retirement savings.
Specific Benefits of SEP IRAs
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No Tax Deductibility Limits
With other IRA accounts, you have limitations if your spouse also has an IRA plan, but with an SEP IRA, you will not lose deductibility on contributions even if your spouse has an employer-supported IRA. This type of IRA is designed specifically for you and your business.
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High Contribution Limits
One of the greatest advantages of an SEP IRA is that it is not limited to $7,500 in contributions per year, and you can contribute much more if you’d like. The limit for an SEP IRA is 25% of your net income up to $72,000, and the percentage of income that you can contribute is almost 10 times higher than traditional IRAs.
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Cover for Employees
Another major advantage with SEP IRAs is that if you own a business with employees working under you, then your SEP IRA can also be extended to cover your employees if they open up individual SEP accounts too. Other than the fact that this works as a great benefit for existing employees, it can also be a major plus point when you’re attempting to hire new ones.
Which Is Better for Your Business or Investment Goals?
A SEP IRA may be the better choice if you:
- Own a small business with few or no employees
- Want high contribution limits with minimal complexity
- Prefer traditional, hands-off investments
A Self-Directed IRA may be better if you:
- Want control over alternative investments
- Already invest in real estate or private deals
- Are focused on diversification and long-term growth strategies
Choosing the right retirement plan can significantly impact your long-term financial future. Whether you’re considering a SEP IRA, a Self-Directed IRA, or a combination of both, working with an experienced professional can help you avoid costly mistakes. Speak with a Self-Directed Retirement Plans specialist today to explore the best strategy for your goals.
Also Read: Self-Directed IRA – Prohibited Transactions and Investments
Don’t navigate complex IRS rules alone. Connect with our experts to avoid costly mistakes and find the right plan for your business.
Frequently Asked Questions
Can I have both a SEP IRA and a Self-Directed IRA?
Yes, you can legally have both accounts as long as you follow IRS contribution limits and eligibility rules.
Is a Self-Directed IRA riskier than a SEP IRA?
Not inherently. Risk depends on the investment choices you make. Self-Directed IRAs require more due diligence because they allow alternative investments.
Do SEP IRAs require contributions for employees?
Yes. If you contribute to your own SEP IRA, you must contribute the same percentage of compensation for eligible employees.
Can a SEP IRA be self-directed?
Yes, a SEP IRA can be structured as a Self-Directed SEP IRA, combining higher contribution limits with alternative investment access.
Which account is better for real estate investing?
A Self-Directed IRA is generally better suited for real estate investments due to its flexibility and control.
