Self Directed SEP IRA
I have a client who is the only employee in his S Corp. He is succesful in investing in foreclosed property, and wants a self-directed IRA. If the business sets up a SEP and as an employee, he opens an IRA with a Custodian that allows SD investments, such as Pensco Trust, could he do the following.
1. Contribute to his employee SEP IRA, which would be in a checking or money market account with the custodian.
2. Take that money and invest in real-estate within the IRA account?
Could this IRA money contributed be converted to a Roth, either within the SEP IRA account or by rolling it to another account?
Permalink Submitted by Alan Spross on Thu, 2011-12-22 03:14
I don’t know why a self directed IRA custodian couldn’t work with a SEP IRA, but I would simply ask them. A SEP IRA is basically just a traditional IRA with special contribution rules. Once the contributions are made they can be invested in anything the custodian provides a market for.
A SEP IRA or part of the balance can be converted to a Roth IRA at anytime, while the SEP is kept open to receive new SEP contributions. The SEP owner is also allowed to make regular TIRA contributions to the SEP as well, although they may not be deductible.
The custodian should also be asked if the structure of the intended holdings can be easily converted to a Roth IRA.
Also, the potential for UBIT taxes should be investigated, since those must be paid out of the IRA.
Permalink Submitted by Edward Lustberg on Thu, 2011-12-22 03:24
Thanks for the quick response Alan. So basically, once that money is contributed to the employee account, it has the same flexibility as any other IRA account.
Do you know how soon contributions can be made? For example, if I know I were to contribute the entire $49K for 2012, could I pay that money in an employees account prior to them receiving the $196K in salary by the end of the year? Or am I limited to 25% of what they have been paid YTD?
Permalink Submitted by Alan Spross on Thu, 2011-12-22 03:49
Contributions can be made earlier than paid just like a non SEP IRA since a regular SEP IRA is not a salary reduction plan, but any excess contributions that result need to be corrected.
Be sure the year of the contribution is specified because SEP IRA custodians are used to receiving prior year contributions for the self employed rather than current year contributions.
Permalink Submitted by Jose Morales on Thu, 2011-12-22 16:42
SEP contributions are reported on a calendar year basis, so there isn’t ever a need to even tell the Custodian what tax year the contribution is being made for, as they have no way of reporting a SEP contribution as either Prior or Current Year. The employer reports the tax year for which the contribution is made when they file their taxes.
Permalink Submitted by Alan Spross on Thu, 2011-12-22 18:03
urusei is correct.
The year for SEP contributions does not have to be specified, but if you make a regular TIRA contribution to the SEP IRA account, you must tell the custodian which year applies if made between 1/1 and 4/15. These are reported on Form 5498 as TIRA contributions rather than SEP contributions.