SEP IRA

SEP stands for Simplified Employee Pension Individual Retirement Account. The whole idea is that it really is "simple." There are no real administration costs if you are self-employed and don't have any employees. If you do have employees, you have to offer them the same deal. SEP funds can be invested in just about anything via brokerage accounts. See the IRS page

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http://www.irs.gov/retirement/article/0,,id=111394,00.html

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Because SEP IRA savings are taxed at the standard income tax rate when they are withdrawn after retirement, they make an ideal place to trade stocks because you don't have to track capital gains and losses or dividend income for each individual transaction. For an account of trading stocks aggressively in an SEP, see:

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http://www.fonerbooks.com/invest.htm

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Contributions to SEP can lower your overall income and in some cases, allow you to make a tradional IRA contribution when you otherwise would have been disqualified.

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SEP-IRA contributions are calculated by applying a profit-sharing percentage to earned income. For employees, the employer may contribute up to 25% of the employee's wages to the employee's SEP-IRA account. For example, if an employee earns $40,000 in wages, the employer could contribute up to $10,000 to the SEP-IRA account because 25% of $40,000 equals $10,000.

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For self-employed persons, the same 25% contribution limit is used, but the contribution needs to be deducted from the self-employment earnings. In effect, then, self-employed persons may contribute up to 20% of their self-employment earnings. For example, if a sole proprietor earns $50,000, she may contribute $10,000 to her SEP. Note that the $10,000 equals 25% of the self-employment earnings net of the SEP-IRA contribution because ($50,000 - $10,000 SEP-IRA contribution)*25% equals $10,000.

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The total contribution to a SEP-IRA account is roughly $40,000, but this amount is indexed for inflation. For example, in 2004, the SEP-IRA contribution limit actually equaled $41,000.

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