Not all SEP IRAs work the same way. Some keep your investment options limited to mutual funds or ETFs. Others give you access to alternative assets like real estate, crypto, and private equity. If you are self-employed or run a small business and want more control over your retirement investments, it may be worth exploring a self-directed SEP IRA.

These plans follow the same contribution and tax rules as regular SEP IRAs, but the difference lies in the investments. With the right custodian, you are not locked into traditional brokerage menus.

Below we’ll walk through how a self-directed SEP IRA works, what makes it different from other retirement accounts, and how to know if this type of plan makes sense for you or your business.

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What Is a Self-Directed SEP IRA?

A self-directed SEP IRA follows the same IRS framework as a traditional SEP IRA. Contribution limits, withdrawal rules, eligibility standards, setup deadlines, and tax treatment all remain the same. The key distinction is the range of investments you can hold.

Most mainstream custodians limit SEP IRAs to traditional assets such as stocks, bonds, mutual funds, and ETFs. A self-directed structure allows a broader menu if the custodian permits alternative assets.

Common alternative investments may include:

  • Real estate
  • Private equity or private lending
  • Crypto or digital assets
  • Certain commodities that meet IRS rules

A broader investment menu can offer more flexibility, but it also introduces additional complexity and oversight requirements.

📌 Also read: SEP IRA vs Roth IRA vs Traditional IRA

How Does a Self-Directed SEP IRA Work?

A self-directed SEP IRA operates under the same structure as a regular SEP IRA. Employers make contributions for themselves and eligible employees. These contributions are optional each year, which can help small business owners manage cash flow in fluctuating years.

Contribution rules include:

  • Up to 25% of compensation, or 20% of net earnings if self‑employed
  • Contributions are typically pre‑tax and deductible to the business
  • If a plan allows Roth SEP contributions starting in 2025, those are after‑tax and not deductible

The self-directed aspect does not affect how contributions are calculated or taxed. It only affects how funds may be invested once they reach the account.

📝 Note: SEP contributions follow employer rules only. Employees cannot make elective deferrals.

Equal Percentage Contributions

SEP IRAs follow strict nondiscrimination rules. Whenever you contribute for yourself, you must contribute at the same rate for eligible employees.

Here is what that means in practice:

✅ If you contribute 10% of your compensation, you must contribute 10% of each eligible employee’s compensation.

✅ Unlike a SIMPLE IRA, you may choose to contribute more or less each year. You may also choose not to contribute in years when business revenue decreases.

✅ Employees cannot make their own contributions. Every dollar added to a SEP IRA comes from the employer.

This structure keeps administration simple, although it also requires careful planning for business owners with multiple employees. You must factor in the cost of contributions for all eligible employees whenever you decide how much to contribute for yourself.

Contribution Limits for a Self-Directed SEP IRA

Self-directed SEP IRAs follow the same contribution rules as traditional SEP IRAs. There are no special rules or increased limits for choosing a self-directed version.

For 2025, you can contribute:

  • Up to 25% of eligible compensation, capped at $70,000
  • If self-employed, your effective limit is 20% of net earnings, after deducting self-employment taxes and the SEP contribution itself

There are no employee deferrals in a SEP IRA. All contributions come from the employer — even if that employer is just you.

Withdrawal Rules and Early Distribution Penalties

Withdrawals from a self-directed SEP IRA follow the same tax rules as traditional SEP IRAs and traditional IRAs.

Here is how it works:

  • After age 59½: Distributions are generally taxed as ordinary income, but no additional penalty applies.
  • Before age 59½: You will owe income taxes plus a 10% early withdrawal penalty, unless an IRS exception applies.

The presence of alternative assets in your self-directed account does not change the taxation or timing of withdrawals. However, liquidity and valuation may become more complicated if you hold hard-to-sell assets like real estate or private equity.

📝 Note: Required minimum distributions (RMDs) begin at age 73 (for individuals turning 73 after 2024), even for self-directed accounts.

📌 Also read: What Is a Self-Directed IRA (SDIRA)?

Who Qualifies for a Self-Directed SEP IRA?

Self-directed SEP IRAs are not a special category with unique eligibility rules. If you qualify for a regular SEP IRA, you can also open a self-directed one, as long as your chosen custodian allows alternative investments.

These plans are designed for business owners of any size, including sole proprietors, partnerships, and corporations. You do not need to have employees to open a SEP IRA.

You may be eligible if:

✅ You own a business or are self-employed
✅ You earn income through contract work, freelancing, or as a sole proprietor
✅ You have no employees, or you are willing to make equal contributions to eligible employees if you do have them

📝 Note: If you are self-employed and have no employees other than your spouse, a solo 401k may offer higher contribution potential. Solo 401k plans allow both employer and employee contributions, which can result in larger tax-deferred savings at certain income levels.

What Counts as an Eligible Employee? 

If you have employees, you may be required to contribute to their SEP IRAs whenever you contribute to your own. The IRS defines “eligible employee” using simple criteria.

To be eligible, an employee must:

✅ Be at least 21 years old
✅ Have worked for you in at least 3 of the last 5 years
✅ Earn at least $750 in compensation in 2025 (indexed annually)

These requirements are based on IRS rules, but employers may choose to apply less restrictive eligibility criteria if desired. For example, you can allow employees under 21 or those with shorter work history to participate, but you cannot apply more restrictive rules than the IRS allows.

What Can You Invest in With a Self-Directed SEP IRA?

The key advantage of a self-directed SEP IRA is the expanded investment flexibility — beyond what most mainstream brokerage firms offer. Traditional SEP IRAs typically limit you to public market assets like stocks, bonds, ETFs, and mutual funds. A self-directed SEP IRA can allow for exposure to nontraditional or “alternative” assets (if the custodian supports them).

Common alternative asset options may include:

  • Cryptocurrency (e.g., Bitcoin or Ethereum)
  • Real estate (direct ownership or through entities like LLCs)
  • Private equity or venture capital
  • Precious metals that meet IRS purity standards
  • Tax liens or promissory notes

However, not all self-directed SEP IRAs are fully open-architecture. Some providers only support a narrow asset class such as crypto-only or real estate-only custodians. Others may require you to hold certain assets through an IRA LLC, which adds complexity and cost.

It is important to review the custodian’s asset policies before opening an account. Make sure they permit the types of investments you intend to make and understand any associated fees, compliance procedures, or reporting requirements.

📝 Note: IRS rules prohibit investments in collectibles (such as art or antiques) and life insurance contracts within any IRA, including self-directed SEP IRAs.

How to Open a Self-Directed SEP IRA

Opening a self-directed account is typically a straightforward process. You can open an account through any qualified custodian that supports the alternative investments you want to hold. Not all providers allow broad access, so it is important to compare custodians carefully.

Once you choose a provider, the setup process usually involves:

  1. Completing a plan agreement and adoption form.
  2. Providing business and identification information.
  3. Designating an initial funding method.

Most providers offer online account setup with digital document signing.

Funding Your Self-Directed SEP IRA

After opening the account, you can fund it in two primary ways:

  1. Employer contributions – These are based on your income for the tax year and must be deposited by your tax-filing deadline, including extensions.
  2. Rollovers or transfers – You may move funds from:
    • Traditional IRAs
    • Other SEP IRAs
    • SIMPLE IRAs (after two years of participation)
    • Eligible employer plans (e.g., 401(k), 403(b))

📝 Note: You cannot roll over funds from a Roth IRA into a SEP IRA, as Roth IRA dollars are after-tax and do not meet rollover eligibility rules for SEP accounts.

Once the account is funded, you may begin placing investments, subject to the types of assets allowed by your chosen custodian.

Final Thoughts

A self-directed SEP IRA gives business owners and self-employed individuals more flexibility in how they invest for retirement. While the core tax benefits and contribution rules are the same as a regular SEP IRA, the ability to hold alternative assets can open the door to a more diversified portfolio.

Still, managing these accounts requires careful planning. If you’re seeking greater investment control within a tax-deferred retirement plan, a self-directed SEP IRA may be worth considering.

Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

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