• You can contribute up to $49,000 per year or 25 percent of your gross income to a SEP-IRA plantax forms image by Chad McDermott from Fotolia.com
  
  If you own a business, starting a simplified employee pension plan or SEP is one way to cut your tax bill and save for retirement. SEP retirement plans are established by an employer and operate under similar rules as a traditional IRA. Employers receive tax deductions for contributions made into employee IRA accounts and can decide each year how much, or if, they want to fund the SEP. Any business that has one or more employees, including self-employed business owners, can start a SEP. Set up for this type of retirement plan requires little paperwork and can be done by you or your accountant.
  
  

Eligibility

• To qualify for a SEP-IRA, eligible employees (including yourself if you are the business owner) must be at least 21 years old, must have earned a minimum of $500 for the tax year and must have worked for the business for three out of five years from the date the SEP was established.
  
  

Contributions

• SEPs allow you to contribute up to 25 percent of your gross modified income, not exceeding $49,000 a year, according to the Internal Revenue Service. After age 50, the IRS allows for catch-up contributions of an additional $5,000 per year. Employees may also use their SEP-IRA account to deposit regular IRA contributions.
  
  

Deductions

• Just as a traditional IRA, any amount contributed to your SEP is not taxed as income and is fully tax deductible. However, if you have active participation in other employer-based retirement plans such as a separate IRA account or profit sharing, deductions may be limited.
  
  

Disbursements

• SEPs operate under the same disbursement rules as the traditional IRA. Withdrawals are taxed as income, and if made before age 59 1/2, are subject to a 10 percent penalty tax. Exceptions to this rule are withdrawing funds to pay for college, purchase a first home or pay for medical expenses not covered by insurance. Once a business owner reaches age 70 1/2, required minimum withdrawals set by the IRS each year apply.
  
  

Easy Set Up

• SEPs may sound complicated but can be set up in a day using a simple form provided by the IRS or an IRS-approved customized form if you maintain a profit-sharing or traditional IRA savings account. Distribute a written agreement detailing SEP guidelines to all eligible employees and ensure each has an established SEP-IRA before making any contributions. Otherwise, you may lose the tax deduction.
  
  

Keep Good Records

• Keep track of your contributions. As with Roth accounts and IRAs, contributions made that exceed the allowable amount will be taxed as income and may be subject to a penalty tax. The IRS advises writing the tax year on the check for each contribution in case you file a tax extension.