A SEP is a special type of IRA.  Under a SEP plan the employer 
creates an IRA account for each eligible employee, hence the name
SEP-IRA.  A SEP is funded solely with employer contributions.  
Employees do not make contributions to their SEP-IRA retirement 
account.  Any money that goes into a SEP automatically belongs 
to the employee.  Thus, the employee has the right to take his 
SEP IRA account money with him whenever he stops working for 
the company.

Any size business can establish a SEP, but the SEP retirement 
plan is utilized mostly by the self-employed and the small 
business with few employees.  The SEP IRA rules dictate that 
if the business contributes for one employee, (i.e., the owner), 
then the business must contribute proportionately for all of 
the employees.  With few exceptions, anyone who works for the 
business must be included in the SEP. However, you can exclude 
from participating in the SEP plan anyone who: 

   1. Has not worked for the company during three out of the 
      last five years. 

   2. Has not reached age 21 during the year for which  
      contributions are made. 

   3. Received less than $450 in compensation (subject to  
      cost-of-living adjustments) during the year. 


SEP IRA contributions to each employee for 2004 cannot exceed 
the lesser of $41,000 or 25% of pay for W2 recipients (20% of 
income for sole proprietors).  The SEP IRA contribution limit 
goes up to $42,000 for 2005, and is subject to cost-of-living 
adjustments for later years.  SEP-IRA rules do not provide for 
additional catch-up contributions for those 50 years old or 
over.

A growing number of self-employed individuals with no employees 
are abandoning the SEP-IRA for a newer type of retirement plan 
called the Solo 401(k) or Self-Employed 401(k).  The two main 
reasons for the switch are 1) they can generally contribute 
much more to a Solo 401(k) than they can under a SEP IRA, and 
2) Loans are allowed under a Solo 401(k), whereas loans are 
prohibited under a SEP-IRA.

Example: Henry, age 52, a realtor received $60,000 in 
compensation from self-employment income in 2004.  For 2004, 
he could contribute a maximum of $27,152 in a Solo 401(k) 
versus a maximum of $11,152 under a SEP IRA. 

However, the Solo 401(k) does not work for businesses with 
employees.  Thus, if your company plans to hire employees or 
has a handful of employees, the SEP IRA may be your best choice 
as a retirement plan that is inexpensive and simple to operate.