A Self-Directed IRA is a type of IRA structure that allows the IRA holder (you) to have more control over your retirement funds. Unknown to some, not all Self-Directed IRAs are the same. It is well known that the IRS allows you to use your IRA to make traditional investments, such as stocks and mutual funds. It is not as well known that the IRS also allows you to use IRA funds to make investments such as real estate, precious metals, tax liens, private business and much more tax-free and penalty free!
The SEP IRA in a Nutshell
A Simplified Employee Pension (SEP) plan provides business owners with a simplified method to contribute toward their employees’ retirement, as well as their own retirement savings. A SEP is essentially an employer-sponsored profit-sharing plan. Contributions are made to a retirement account or annuity set up for each plan participant.
A SEP IRA account is a traditional IRA and follows the same investment, distribution, and rollover rules as traditional IRAs. Employees must be included in the SEP plan if they have
- attained age twenty-one,
- received at least $550 in compensation from your business for the year, and
- worked for your business for at least three of the past five years.
The three-of-five eligibility rule means you must include any employee in your plan who has worked for you in any three of the past five years as long as the employee has satisfied the other plan eligibility requirements. This is the most restrictive eligibility requirement allowable. You can choose to use less restrictive participation rules in your plan, such as allowing employees to participate immediately after they start work or after a shorter period of employment. If you use the three-of-five rule, you must count any work, no matter how little, in each of the prior five years. Use plan years (often the calendar year), not years based on the date the employee started working for you.
The contributions you make to each employee’s SEP IRA each year cannot exceed the lesser of
- 25 percent of compensation; or
- $53,000 for 2015.
There are no catch-up contributions for a SEP IRA as there are for a 401(k) plan. These limits apply to contributions you make for your employees to all defined contribution plans, which includes SEPs. Up to $265,000 in 2015 of an employee’s compensation may be considered. Also, contributions must be made in cash, and you cannot contribute property.
Types of Self-Directed SEP IRA Accounts
There are essentially three types of Self-Directed SEP IRAs:
1. Financial Institution Offered Self-Directed SEP IRA
The most popular Self-Directed SEP IRA account offered is the financial institution Self-Directed SEP IRA. The reason that this type of Self-Directed SEP IRA is so popular is because it is generally offered by the major financial institutions, such as Bank of America, Wells Fargo, Fidelity, Vanguard, etc. With this type of Self-Directed SEP IRA, the SEP IRA holder is generally able to only make SEP IRA investments offered by the financial institution which typically only includes financial related investments, such as stocks, mutual funds, and ETFs. Even though these types of IRA accounts are called “Self-Directed IRA” accounts that are very limited in their investment scope and do not allow IRA investors to make any non-traditional investments, such as real estate.
Why do the financial institutions limit the investment options available?
A financial institution that offers IRA accounts is not required to offer its IRA investors with the opportunity to make all allowable types of IRA investments. For example, even though real estate is an IRS approved investment, an IRA custodian is not required or obligated to offer that investment option. Accordingly, most financial institutions offering SEP IRA accounts will restrict the SEP IRA investment option to financial products offered by the financial institution. The reason behind this is quite clear – a financial institution earns fees from the sale of financial products, not by allowing its clients to pull money out of the IRA account to buy real estate from a third-party.
2. Custodian Controlled Self-Directed SEP IRA
IRA Financial Trust Company offers Self-Directed SEP IRA investors full IRA custodial services for traditional and alternative asset investments, such as real estate. All IRA funds will be held with Northern Trust, an FDIC insured global banking leader for over 125 years, before the client directs the funds for investment.
Until a 1996 court case, the custodian controlled Self-Directed SEP IRA was the only way one was able to use IRA funds to make a non-traditional investment, such as real estate. In essence, with a custodian controlled Self-Directed SEP IRA, every step a SEP IRA holder wanted to make had to be carried out through a custodian, such as IRA Financial Trust Company. In other words, the SEP IRA holder directs the IRA custodian, IRA Financial Trust, to make the investment directly. All transaction related activity, such as paying expenses or depositing checks, must be paid by the IRA custodian.
3. “Checkbook Control” Self-Directed SEP IRA LLC
IRA Financial Trust is proud to offer Checkbook IRA custodial services along with its full service IRA administration services, all for one low price without any transaction or asset valuation fees. IRA Trust Company is one of the few full-service IRA custodians who specialize in establishing Checkbook Control IRA LLC accounts.
IRA Financial Trust Company is a regulated, non-banking financial institution that is made up of retirement tax specialists committed to helping you make Self-Directed retirement investments quickly while minimizing annual fees. IRA Financial Trust Company was founded by tax attorneys who worked at some of the largest law form in the world, including White & Case LLP and Dewey and LeBoeuf LLP and have helped over 12000 clients self-direct their retirement funds through their ownership in the IRA Financial Group LLC. Our experience working with Checkbook Control IRA LLC structures is unmatched in the industry.
In the 1996 case of Swanson vs. Commissioner, 106 T.C. 76 (1996), the tax court gave its blessing to a new type of Self-Directed IRA structure — the Self-Directed SEP IRA LLC also known as the Checkbook SEP IRA— that is much simpler than investing through a regular custodial controlled Self-Directed IRA account.
With a “Checkbook Control” Self-Directed SEP IRA, the SEP IRA holder (you) will have total control over your SEP IRA funds. You will no longer have to get each investment approved by the IRA custodian of your account like in a custodian controlled Self-Directed SEP IRA. Instead, with IRA Financial Trust Company’s Checkbook Control SEP IRA account, all decisions are truly yours. When you find an investment that you want to make with your SEP IRA funds, simply write a check or wire the funds straight from your Self-Directed SEP IRA LLC bank account to make the investment.
Under the Checkbook SEP IRA format, the Checkbook Control SEP IRA is set up as a Self-Directed account with IRA Financial Trust that's capitalized by funds rolled over from your current retirement account. The funds are deposited with Northern Trust who serves as IRA Financial Trust Company’s banking partner. Then, a Limited Liability Company (“LLC”) is created in which your new SEP IRA purchases all the membership units/interests. Now, your money is held in an LLC and you are ready to invest at your discretion. A “Checkbook Control” Self-Directed SEP IRA allows you to eliminate the delays, IRA custodian transaction fees, and IRA account annual valuation fees, enabling you to act quickly when the right investment opportunity presents itself.
With a Self-Directed SEP IRA, when you find an investment that you want to make with your SEP IRA funds, simply write a check or wire the funds straight from your Self-Directed SEP IRA LLC bank account to make the investment. The Self-Directed SEP IRA allows you to eliminate the delays associated with an IRA custodian, enabling you to act quickly when the right investment opportunity presents itself.
IRA Financial Trust offers one low, flat fee IRA Custodian fee without any transaction fees and annual account valuation fees. We believe that Self-Directed SEP IRA investing should be affordable and simple. IRA Financial Trust is committed to helping all our clients build their retirement wealth through Self-Directed IRA investments without the high costs and complexities.
To learn more about what type of Self-Directed SEP IRA account will best suit your retirement and investment needs, please contact a Self-Directed retirement expert at 1-800-472-1043.