SEP-IRA
A Simplified Employee Pension plan (SEP-IRA) is a plan that allows an employer to make contributions toward an employee’s retirement (or his or her own, if self-employed). Used mostly by sole proprietorships or small businesses, SEPs generally allow employers to contribute a maximum of 25 percent of an employee’s compensation, or $45,000 in 2007, $46,000 in 2008, whichever is less. If you are self-employed, the maximum contribution is based on net profit from the business, not gross income. SEP-IRAs are subject to most of the Traditional IRA rules and regulations (e.g., investment and distribution rules).

Money contributed to an employee’s SEP-IRA belongs to the employee as soon as it is contributed. Employees are, within limits, able to exclude the entire SEP contribution from current income. Employers are not, however, required to make minimum contributions, so an employee cannot be sure of the amount an employer will contribute from year to year. If the employee leaves the company, all SEP contributions can be taken with the employee.

SIMPLE IRA
A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement plan maintained by an employer with no more than 100 employees who earned at least $5,000 for the preceding calendar year. The SIMPLE IRA permits you to make contributions under a qualified salary-reduction agreement. Your employer must match your contribution with a minimum of one percent and a maximum of three percent of your annual compensation. If you are an eligible employee, you may contribute up to $10,500 in 2008.

For example, if you make $25,000 a year and decide to contribute five percent of your earnings ($1,250) through salary reduction, and your employer makes a matching contribution of three percent ($750), the total contribution to your SIMPLE IRA would be $2,000. If you are 50 or older in 2008, you may make an additional “catch-up” contribution. See "Catch-Up" Contributions.

SIMPLE IRA plans are taxed the same as Traditional IRAs; generally, contributions are not taxable until withdrawn. As with all forms of IRAs, tax penalties may be imposed if you withdraw funds from a SIMPLE IRA before you are age 59 1⁄2, including a 25 percent penalty if withdrawals are made during the first two years of funding. There are also restrictions on what type of account you can roll a SIMPLE IRA into during the first two years of funding.