Self-Directed SEP IRA

A Self-Directed SIMPLE IRAs Advantages vs. a Self-Directed SEP IRA

Depending on your company and your goals, you may find it to be a good idea to open a Self-Directed SIMPLE IRA program or a Self-Directed SEP IRA. The problem? Most people don’t know the distinctions between the two, even though these distinctions can really add up.

What’s the Difference Between Self-Directed SIMPLE IRAs and a Self-Directed SEP IRAs?

On the surface, the two account types are so similar that many people believe they are the same thing. But the SEP stands for “Simplified Employee Pension Plan” while SIMPLE stands for Savings Incentive Match Plan.

In Self-Directed SIMPLE IRAs, you will have many of the same functions of a Traditional IRA—albeit with a higher contribution limit. For example, in 2018, the contribution limit was $12,500 and the limit in 2019 is $13,000.

A SIMPLE plan is great for companies with 100 employees or fewer, especially when the employees will be making the contributions themselves, out of their paycheck. These contributions are on a pre-tax basis, similar to many other retirement account types.

With a Self-Directed SEP IRA, however, an employer can make a tax-deductible contribution on behalf of their employees. This helps incentivize employers to contribute to a pension plan, which in turn makes it much more of a “retirement benefits package” for employees, and more of an incentive for hiring.

A Self-Directed SEP IRA also has a very high contribution limit, even higher than those in a Self-Directed SIMPLE IRA. The employer can contribute either $55,000 or up to 25% of the employee’s salary, whichever of the two numbers is less. That makes the Self-Directed SEP IRA a nice way to add retirement benefits when hiring.

It’s also worth noting that a Self-Directed SIMPLE IRA comes with steeper penalties for early withdrawals—defined as taking withdrawals before the age of 59 ½. For the SEP IRA, these withdrawal penalties are 10% plus the taxes, while the SIMPLE IRA penalties are 25% plus taxes if the money is taken out within two years of participating in the SIMPLE IRA.

Choosing a Self-Directed SIMPLE IRA or Self-Directed SEP IRA

For most people, these types of plans are typically under consideration when you own a small business. Establishing a Self-Directed SEP IRA for employees, for example, can be a major incentive for hiring, while a Self-Directed SIMPLE IRA typically relies more on the individual doing the saving.

For many people, that means choosing what type of retirement plan your company is going to have. But if you have few employees or even just yourself, that can change the equation.

When it comes to self-direction, both accounts offer plenty of options. The advantage of self-directing retirement is that you can invest in a range of property types, such as precious metals and real estate. However, it’s important to keep in mind that if you are using these accounts for employees, you will have to think about what kinds of savings your employees typically want.

How to Use Self-Direction for Retirement Savings

Whether you have a Self-Directed SIMPLE IRA or a Self-Directed SEP IRA, it’s important to have a strategy when it comes to your retirement. Are you planning on using a wide variety of assets, or focusing solely on one asset class? What kind of portfolio do you want to build, and how aggressive do you want it to be?

These strategy questions will affect the type of account that’s better for you—for example, a Self-Directed SEP IRAs high contribution limits may suit those with the cash to put aside plenty for real estate investments. Make sure you think through all of these issues before you choose.

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