If you’re self-employed, you’re in a unique position when it comes to planning for retirement. Unlike traditional employees, you don’t have access to an employer-sponsored retirement plan, like a 401(k) or a pension plan. However, that doesn’t mean you’re out of options. One of the most effective retirement savings vehicles available to the self-employed is a Self-Directed SEP IRA.
The Benefits of Self-Directed SEP IRAs
Self-Directed IRAs are retirement accounts that give you more control over your investments than traditional IRAs. With a Self-Directed SEP IRA, you can invest in a wider range of assets, including real estate, private equity, precious metals, and more. You’re not limited to the traditional stocks and bonds that most retirement accounts invest in. This can help you diversify your portfolio and potentially increase your returns.
Another benefit of a Self-Directed SEP IRA is that you can contribute more money than you can with a traditional IRA. In 2021, for example, you were able to contribute up to 25% of your net earnings from self-employment, up to a maximum of $58,000. That’s a significant amount of money that you can use to build your retirement nest egg.
How to Set Up a Self-Directed SEP IRA
Setting up a Self-Directed SEP IRA is relatively straightforward. The first step is to choose a custodian for your account. This is the company that will hold your assets and manage your account. You’ll want to choose a custodian that specializes in Self-Directed IRAs and has experience with the type of investments you want to make.
Once you’ve chosen a custodian, you’ll need to fill out an application and provide some basic information, like your name, address, and social security number. You’ll also need to provide documentation to show that you’re self-employed and eligible to open a SEP IRA.
After your account is set up, you can start making contributions and investing your money. You’ll have a wide range of investment options to choose from, so it’s important to do your research and choose investments that align with your goals and risk tolerance.
Why Use Self-Directed SEP IRAs?
There are several advantages to choosing a Self-Directed SEP IRA over other retirement savings options. One of the biggest advantages is the flexibility you have when it comes to investing. You’re not limited to a pre-set menu of investment options, like you are with a 401(k) or a traditional IRA. This means you can choose investments that you believe will perform well and help you reach your retirement goals.
Another advantage is the tax benefits. Like all IRAs, Self-Directed SEP IRAs offer tax-deferred growth. That means you won’t pay taxes on your investment earnings until you withdraw the money in retirement. If you’re in a higher tax bracket now than you expect to be in retirement, this can result in significant tax savings.
Finally, a Self-Directed SEP IRA is easy to set up and manage. Once your account is set up, you can make contributions and manage your investments relatively easily. You don’t need to worry about filling out complicated paperwork or dealing with a lot of administrative tasks, as that’s what the Self-Directed IRA administration firm is for.
If you’re self-employed and looking for an effective way to save for retirement, a Self-Directed SEP IRA could be a smart choice. With more control over your investments and the ability to contribute more money than you can with a traditional IRA, a Self-Directed SEP IRA can help you build a substantial retirement nest egg.