What It Is

A SEP-IRA, or Simplified Employee Pension IRA, is a tax-deferred retirement plan provided by sole proprietors or small businesses, most of which do not have any other retirement plan. Contributions are made by the employer, up to 15% of each employee's total compensation, with a maximum contribution of $25,500. With the exception of the higher contribution limits, they are subject to the same rules as a regular IRA.

In a SEP-IRA, contributions and the investment earnings can grow tax-deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income.

Why We Like It

You can also invest in IRAs: employees with SEP-IRAs can also invest in regular IRAs, giving you another opportunity to save for your retirement.

You save taxes on contributions and earnings: employer contributions are made pre-tax, and the contributions and earnings can grow tax-deferred until they are withdrawn. Tax-deferred contributions and earnings make up the best one-two punch in investing.

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Employer contributions: only employers can contribute to SEP-IRAs. While this means you have less control over the amount contributed, if you have a generous employer looking to expand your overall benefits package, this can be the beginning of a nice nest egg for your retirement. Besides, employer contributions to a SEP-IRA do not preclude you from investing in an IRA on your own.

Who Is Eligible

Depending on your company's rules, you may be eligible in any year you earn a salary and are a regular employee.

Contributions

Contributions are made by the employer (there are no employee contributions), up to a maximum of 15% of each employee's total compensation. SEP-IRA contributions do not reduce your salary. The maximum compensation base is $170,000, making the maximum contribution per employee $25,500.