SEP stands for “Simplified Employee Pension.” These are popular among high-income self-employed professionals such as doctors or dentists with no employees or only a few employees.
As the owner of your company, you can contribute up to 25% of your income, up to a certain maximum every year ($53,000 in 2015 and 2016), but you must also contribute the same percentage for each of your employees. For this reason, SEPs are not usually the best choice for companies with more than a few employees.
For example, let’s suppose you make $200,000 in 2014 and contribute $50,000 to your SEP IRA (25% of your income). If you have an employee who makes $50,000 in 2014, you must also contribute $12,500 to his or her SEP IRA (25% of your employee’s income).
You can exclude new employees for up to three years after you hire them, and all contributions are discretionary (never required). SEPs are much simpler and less expensive to set up and administer than conventional retirement plans such as 401(k)s.
For more details about SEPs, click here.