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How to Turn Your Client’s IRA into a Transaction

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By Chris Clothier

SEP IRAs are also perfect for brokerages because they provide retirement benefits for the business owners as well as their employees. There are no significant administration costs for a self-employed person with no employees. If the self-employed person does have employees, all employees must receive the same benefits under a SEP plan. Since SEP accounts are treated as IRAs, funds can be invested the same way as any other IRA.

Participating employees must be at least 21 years of age, have worked for the employer for at least three of the previous five years, and received at least $500 in compensation for the tax year. When funds are withdrawn after the worker reaches 59, they are taxed as ordinary income.

Here are three important rules to maintain tax deferred status:

• A key component to keeping the tax advantages for a SEP IRA is to keep it passive. Arms’ length transactions are key and it is vitally important that investors only make purchases where they plan to use the property as an investment property that will be occupied by a tenant and not the owner themselves. You cannot live in it yourself.

The income provided from your SEP IRA is your money, but that does not mean you can bypass the IRA and take the money directly from the investment. Just like a traditional IRA, there are time frames for taking withdrawals and distributions. If you deviate from them you can wipe out the tax protection and advantage, and incur taxes and penalties for violating the rules. You cannot purchase property, place it in the name of a family member or LLC and then set up a SEP IRA to purchase that property. The transactions must be arms’ length in nature; you cannot buy something from yourself or from your spouse or children or parents. You can purchase property and title it in the name of an entity and fund it with your SEP IRA as long as you do not own the property beforehand.

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