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The SEP-IRA is a very interesting version of the original IRA designed for individuals. The SEP-IRA performs the same function, but for business owners.
A SEP IRA is an abbreviation for Simplified Employee Pension Individual Retirement Account. It gets its name from the fact that it is, actually, simple. It is intended to give small business employers and self employed workers an IRA that functions much the same way as a pension plan, but on a simpler scale. The SEP IRA can also be rolled over into other forms of IRAs should employment change and the owner becomes eligible for a different plan.
The administrative costs of a SEP-IRA are very low. If you are self-employed, there are generally no administrative costs at all. One requirement of the SEP-IRA is that if a business has employees then all of them must receive the same benefits. In order to be eligible for employee participation in a SEP-IRA, the employee must be over the age of 21, and he would have had to have been employed for at least three of the last five years. The employee would have had to have been paid at least $450 dollars in wages in the previous year.
The contributions to the plan are made by the employer from the earnings of the employee. Rather than putting it in his paycheck, it is deposited into the SEP-IRA. The maximum contribution is 25% of the total income of the employee. The maximum amount that can be contributed in a year was set at $44,000 in 2006 and will be adjusted for inflation in the coming years. The portion of the employees compensation paid into the plan is deductible from his taxes and will result in a tax savings.
A self-employed person is limited to 20% of his earnings. His maximum yearly contribution is around 18.6% of his net profit as calculated on his self-employed worker tax return. The SEP-IRA works like a Traditional IRA when it comes to distributions. They are taxable at the rate in effect at the time of the withdrawal and there is a penalty if any withdrawal is made before the age of 59 and a half.
The SEP-IRA is a good compromise for a small employer who wishes to provide a pension plan, but does not have the resources to establish a conventional type of plan. In the past, the small business owner was not able to have a profit sharing type pension plan at all. The SEP-IRA has made it not only possible, but as the name implies, it is also simple to understand and easy to administer. | 
