A Simplified Employee Pension Individual Retirement Account, or SEP IRA, differs from other IRAs because it allows for employers to make contributions on behalf of employees, similar to a 401(k). The advantage of SEP IRAs over 401(k)s is lower administration costs and more investing options. SEP IRAs are considered an alternative to 401(k)s and pension plans.
Employers can contribute up to 25% of an employee’s wages in a SEP IRA, and contributions made to the account are tax deductible for that year. When making withdrawals, however, SEP IRA funds are treated as regular taxable income.
The qualification rules for SEP IRAs are very loose. In general, an employee must:
- Be 21 years of age or older,
- Have worked for the employer for at least the past five years, and
- Have earned at least $500 in wages during the tax year.
A SIMPLE IRA is similar to an SEP IRA, but allows contributions from both the employer and employee. Only eligible employers (those with 100 employees or less) are allow to establish these plans.
Contributions made to SIMPLE IRAs are tax deductible, but withdrawals are subject to normal income taxes (similar to Traditional IRAs). In 2015, the contribution limit for Simple IRAs was $12,500.
There is also a two-year waiting period from the beginning of a SIMPLE IRA’s establishment to rollover the funds into a different retirement account.
A Self-Directed IRA (SDIRA) is a type of IRA that requires the account owner to make the investment decisions on behalf of the plan. A custodian (either a bank/broker or LLC the owner sets up) must hold the IRA assets on behalf of the owner. Although technically Roth and Traditional IRAs fall under the “self-directed” category, the term is used more frequently to describe a scenario in which the owner sets up an LLC to hold the account.
Self-directed IRAs using an LLC as the custodian are the most flexible of all retirement plans when it comes to investing options. Owners can invest in stocks, bonds, CDs, real estate (even foreign real estate), franchises, other businesses, and more. Investments not allowed in Self-Directed IRAs incldude collectibles (stamps, baseball cards, etc.), insurance, and real estate for personal use.
Contribution limits for 2015 in Self-Directed IRAs are $5,500, or $6,500 if the owner is 50 years of age or older.