For 2008, the maximum possible contribution to any participant's SEP account is $46,000 ($45,000 in 2007).

The Advantages and Disadvantages

Advantages: You can establish a SEP at just about any brokerage firm or financial institution. Simply fill out Form 5305-SEP, which takes only a few minutes. It doesn't get any easier than this. Even better, you can establish a SEP as late as the extended due date of the federal income tax return for the year the initial deductible contribution will be made.

Here's an example, assuming you are a sole proprietor. You extend your 2007 individual tax return as long as possible, to October 15, 2008. You have until that date to establish your 2007 SEP and make the initial contribution. You can then deduct that contribution on your 2007 return. Contributions for later years can also be deferred until the extended tax return due date. 

If you run your business as a calendar-year corporation, you can extend the 2008 corporate return to as late as September 15, 2009. The corporation has until that date to establish the SEP and make the initial contribution. The company can then deduct that amount on its 2008 Form 1120. Contributions for later years can also be deferred until the extended due date for the corporate return.

If you have a large amount of self-employment income or salary, a SEP allows you to make generous annual deductible contributions to the account, as much as $46,000 for 2008 ($45,000 for 2007). However, you always have the flexibility to contribute less than the tax-law maximum, or nothing at all, if cash is tight in your business.

Once your SEP is up and running, there are very few administrative details to worry about.

Employees Eligible for SEP Inclusion are Those Who Have:      Reached age 21.      Worked at least three of the last five years immediately preceding the current year.      Earned at least $500 in compensation from your company in the year for which contributions are made.       Nonresident alien employees having no U.S. source income from your firm.      Employees covered by collective bargaining, if retirement benefits were the subject of good faith bargaining.

The government doesn't currently require any annual filings for SEPs, as it does for some other types of retirement plans.  

Disadvantages: Depending on your age and income, you might be allowed to make larger annual deductible contributions to a personal retirement account with a different plan, such as a 401(k), a SIMPLE-IRA, or a defined benefit pension plan.

If your business has employees, contributions - which are fully deductible to you -  are generally required for those who have worked for you during at least three of the past five years (see right-hand box for exceptions). Also, since all contributions to employee SEP accounts vest immediately, an employee can quit at any time without losing any of his or her SEP money. That's great for the employee. But if you have more than a few trusted staff members, you may want to consider a different retirement plan option.

Another potential drawback is that borrowing from a SEP account is prohibited. In contrast, borrowing is allowed under most other types of retirement plans (with the exception of SIMPLE IRAs), assuming the plan document permits loans.

Conclusion: If you want maximum simplicity from a tax-favored retirement plan, a SEP may be the best choice. Of course, that is, assuming you don't mind covering your employees. A SEP is your only choice if you want to make a deductible contribution for last year, even though no plan was actually in existence at the end of last year. Contact your tax adviser to learn more about SEPs or to hear about other retirement plan alternatives for your business.