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What is a SEP IRA?

A SEP IRA is a type of traditional IRA for self-employed individuals or small business owners. (SEP stands for Simplified Employee Pension.) Any business owner with one or more employees, or anyone with freelance income, can open a SEP IRA. Contributions, which are tax-deductible for the business or individual, go into a traditional IRA held in the employee's name. Employees of the business cannot contribute - the employer does. Like a traditional IRA, the money in a SEP IRA is not taxable until withdrawal.

One of the key advantages of a SEP IRA over a traditional or Roth IRA is the elevated contribution limit. For 2010, business owners can contribute up to 25% of income or $49,000, whichever is less. If you're age 50 and over, the cap is $54,500