It’s easy to think that some retirement accounts aren’t available to the average person. They sound like complicated tax situations, and many of us might not think we’d qualify. But that’s not always the case. One clear example is the Self-Directed SEP IRA. It’s true that most individuals who work as W-2 employees probably wouldn’t consider a SEP IRA in their retirement plans. But for anyone who’s self-employed, the Self-Directed SEP IRA should be considered a potential option. Here’s what you’ll need to know about the requirements for SEP IRAs to see if it’s something that you might consider as well.
When You Want a Plan with Low Start-Up and Operating Costs
You’ll find that SEP IRAs tend to be better for self-employed individuals and small businesses. That’s because these are the types of people who seek low start-up and operating costs for the retirement plan they put in place. For large companies, there might be separate retirement plans and 401(k)s that work out better for the way they create benefits for their employees. But a Self-Directed SEP IRA is a great way for anyone with their own business—if it’s self-employed—to get started with a retirement plan that puts them on the path to financial freedom.
When You Want to Contribute to Your Employees’ Retirement
One other key reason many people invest in Self-Directed SEP IRAs? They view these investments as more than just financial investments; they’re also investments in their employees. Creating a SEP IRA plan for employees that you contribute to is a great way to ensure that people will want to continue to work at your business. This creates a retirement benefits package that goes beyond what a basic company might have. For small businesses, it can be a great way to stay competitive with what larger companies are offering.
Having a Small Business, or Self-Employment Income
A Self-Directed SEP IRA potentially kicks in when you have established income for yourself in the form of business income. You don’t have to have a massive income or build a massive business to have a SEP IRA…you simply need to get started.
Self-Directed SEP IRA Eligibility
Now that you know some of the basics, it’s time to get into the details. Who can build a Self-Directed SEP IRA? Here’s what you’ll need to know:
- From the employee’s perspective, you’ll be eligible for a SEP if you have reached the age of 21. The employee should have worked at the business for at least 3 of the previous 5 years and received at least $600 in compensation from the company in 2021, but this will most likely increase in the future.
- Any business owner with one or more employees, or anyone who earns income through contract work like freelancing, can open a SEP IRA.
From there, you’ll be expected to follow the rules of contributions. Remember that employees will have complete control over their contributions, which means that it might not be as uniform as experience as you might have initially planned.
You can decide what to contribute each year but remember that you also have to contribute the same for all employees. For this reason, a SEP IRA gives you a special amount of control when you’re the only employee at the company!