Self-Employed Individuals and Self-Directed IRAs

Many people are attracted to investing with Self-Directed IRAs because of the access to alternative asset classes.  Self-Directed Real Estate IRAs are popular, but you can also focus a Self-Directed IRA on other promising and potentially lucrative asset classes like gold and precious metals, oil and gas, closely-held corporations, partnerships, LLCs, farmland and ranchland, private lending, and the like.

But they are often deterred by the low annual contribution limits on Self-Directed IRAs: Under current law, investors are limited to contributing a maximum of $5,500 to a Self-Directed IRA in any given year. Those over age 50 get another $1,000, for a total of $6,500 per year. And those with incomes over a certain threshold can’t contribute to a Self-Directed Roth IRA at all.

With such modest contribution limits, it is tough to get much traction in some asset classes. $5,500 does not buy a home and is not much to work with in private lending. Unless you are rolling over a big 401(K) from a former employer you have been with for a long time, it takes a long time to get some traction going with a Self-Directed IRA.

But if you have the income to write some bigger checks, and you are looking to put more money to work leveraging the advantages of a tax-deferred retirement account, you can think beyond the traditional and Roth IRA.

For example, if you own your own company, or you have some substantial income from self-employment, you can open a Self-Directed Solo 401(K) account or a Self-Directed SEP IRA (simplified employee pension) with American IRA, LLC.

These plans are most efficient for the self-employed or for those with ‘mom and pop’ businesses with no full-time employees other than a spouse. But Self-Directed 401(K) plans and Self-Directed SEP IRAs work fine even if you have employees. Just bear in mind you have to make contributions for full-time employees on the same basis you make contributions for yourself, your spouse and for managers.

Self-Directed Solo 401(K)s

The Self-Directed Solo 401(K) allows you to contribute much more each year than you can using a Self-Directed IRA:

  • As an employee, you can contribute up to 100% of earned income compensation, to a maximum of$18,500 in 2018, or $24,500 in 2018 if age 50 or over.
  • As the employer, you can make additional contributions up to 25% of the employee’s total compensation as defined by the plan.

Self-employed individuals act as their own employer. For you, your earned income amounts to your total income from self-employment after deducting ½ of your self-employment tax for the year, as well as your own contribution to your own Self-Directed Solo 401(K).

Self-Directed SEP IRAs (Simplified Employee Pension Plans)

These plans are popular among small business owners who do not want to establish full-fledged 401(K)s. For the 2018 tax year, you can contribute up to 25 percent of compensation, up to $55,000 for the year. That is ten times more than you can contribute to a traditional or Roth IRA.

Generally, you must contribute to your employee’s Self-Directed SEP IRA plans along with your own. You do not have to contribute every year. But if you contribute to your own plan, you have to contribute to the plan on behalf of all eligible employees.

Self-Directed SEP IRAs do not allow for individual contributions – they are funded entirely by employers. However, you can contribute if you are self-employed, as your own employer.

Unlike 401(K)s, Self-Directed SEP IRAs do not allow for ‘catch-up’ contributions for those over age 50.

This still generally works out to a much greater possible contribution limit for a Self-Directed Solo 401(K), compared to what is available to you in an IRA.

But you can do both. You can contribute to a Self-Directed IRA and a 401(K) or Self-Directed SEP IRA in the same year – though your deductible IRA contributions may be affected by virtue of the fact that you are covered by the employer retirement plan that you created.

You can also invest in alternative asset classes in both, with your American IRA accounts.

The result is you can build wealth within your self-directed retirement accounts up to 10 times faster than you can with an IRA alone.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at

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