How to Transfer a SEP IRA to a Self-Directed IRA

If you’re a small business owner or work for one, you may be familiar with a retirement savings account known as a Simplified Employee Pension Individual Retirement Account (SEP IRA). This type of plan can be a win-win, as it enables business owners to offer a tax-advantaged retirement savings option to their workers without the requirements and complexity involved in a larger plan like a 401(k), which requires annual reporting and monitoring contributions.

What is a SEP IRA?

A SEP IRA is different from other types of employer-sponsored plans in that your employer makes contributions on your behalf instead of you contributing the funds directly. The contributions are tax-deferred, meaning that you’ll only pay taxes when you withdraw the funds at retirement. On the employer’s side, contributions to a SEP IRA are tax-deductible, lowering the business's overall taxable income.

If you didn’t initially open a SEP SDIRA, you may become interested in how to transfer your standard SEP IRA to a SEP SDIRA. Self-Directed IRAs give you more control over the types of vehicles you can invest in and provide the ability to purchase alternative assets like real estate, precious metals, private equity and more to diversify your retirement planning.

SEP IRA Eligibility

There is no minimum or maximum number of employees that an employer needs to have to offer a SEP IRA. In fact, even self-employed individuals or sole proprietors can set up a SEP IRA for themselves. To be eligible, employees must meet the following criteria:

• Be at least 21 years old
• Have made at least $750 in annual compensation
• Have worked for the employer offering the SEP IRA for at least three of the past five years

SEP IRA Contribution Limits

Employers can contribute up to 25% of an employee’s compensation to a SEP IRA. This does, however, have certain limits as outlined by the IRS, which you can see below:

Why Transfer a SEP IRA to a SEP Self-Directed IRA?

You may wish to transfer your SEP IRA to a SEP Self-Directed IRA if you’d like to choose your own investments and have the ability to invest in a much wider variety of asset classes, including:

• Real estate
• Precious metals
• Cryptocurrency
• Private equity
• Mortgages and notes

Just like traditional assets, alternative vehicles are subject to fluctuations of the market, so it’s important to keep a healthy mix of diversified assets in your retirement portfolio. Also, keep in mind that Traditional and Roth IRA contribution limits are lower than SEP IRA contribution limits. For up-to-date SDIRA contribution limits, click here.

How to Transfer a SEP IRA to a Traditional SDIRA

If you’re an employee that holds a SEP IRA through your employer, you are the retirement account holder, meaning it’s up to you to transfer your SEP IRA to a self-directed account. Unless your employer is actively making contributions to your SEP IRA, you do not need to inform your employer if you wish to transfer your funds to a SEP SDIRA. The steps for doing so are simple:

1. Choose a SDIRA custodian: Open your Self-Directed IRA with a reputable, experienced custodian, such as Forge Trust, that can guide you through the process.
2. Fund the account: Your custodian will guide you in filling out the proper paperwork involved in initiating the transfer to the SDIRA.
3. Make an investment: Select your investment and submit the appropriate investment authorization form.

Moving a SEP IRA to SDIRA: What You Need to Know

Transferring your SEP IRA to a SEP Self-Directed IRA gives you the freedom to diversify your retirement portfolio with investments in alternative assets including real estate, private equity, precious metals, and more.

Typically, this process is considered an IRA transfer, as it involves moving tax-deferred dollars from one account into another without triggering a taxable event.

It’s important to note that if you’re considering converting a SEP IRA to a Self-Directed Roth IRA, it would be considered a Roth conversion. A Roth conversion involves moving tax-deferred funds into an account funded with after-tax dollars. That means the converted amount will be taxed as income in the year the conversion took place. While a Roth conversion can be a strategic move for long-term tax planning, it’s essential to consult a tax professional to determine what’s best for your financial situation.

When choosing a custodian for your SDIRA, it’s critical to choose one that is experienced in handling alternative investments. The right custodian can ensure a smooth transfer and help you navigate the nuances of SDIRA compliance.

Ready to Take the Next Step?

Get started by opening a SEP Self-Directed IRA with a trusted custodian today and take control of your retirement investments.