We previously discussed how to choose between IRA account types; whether you decide on a Traditional or Roth IRA basically depends upon how you want to arrange your taxes. But what if you are self-employed? Freelancers and other contractors have the option of a Simplified Employee Pension, or SEP IRA. Before shopping around for the best rates, however, there are important differences between the SEP account and the other types of IRAs. Comparatively, SEP IRAs

• Have different contribution limits
• Disallow “catch-up” contributions
• Have a mandatory distribution age
• Are tax deductible

Basically, a SEP IRA can be set up by someone who is self-employed; you can also set up a SEP on behalf of one of your employees. (The Internal Revenue Service says that any employer can set up a SEP for herself or an employee, as long as a formal agreement is executed and employees receive copies of it.)

Some of the main differences between SEPs and other types of IRAs concern contribution limits. As of 2009 for instance, Traditional and Roth IRAs allow a limit of $5000 per year in contributions, plus “catch-up” contributions if you miss a year and you are age 50 or older. SEP IRAs do not allow catch-up deposits, but SEP plans do have more generous contribution limits–either $49,000 or 25% of an employee’s salary, whichever is less.

Yet SEP IRAs are similar to Traditional IRAs in two ways. First, SEP accounts have a minimum distribution age–your financial institution will make you start taking funds out of the SEP at age 70 1/2. Also like a Traditional IRA, SEP IRAs are tax deductible. You may even be eligible for a $500 tax credit for the first three years of the plan, under current IRS rules.

Besides the obvious tax breaks–and what small business or self-employed person doesn’t want a break from taxes?–there are some additional key benefits of a SEP IRA. According to the U.S. Department of Labor, you don’t generally need to file any paperwork with the government (other than your tax returns, of course) when you set up a SEP account. In addition to sole proprietorships, partnerships and corporations are also eligible to establish a SEP. Start-up costs are very low compared to traditional pension plans, too.

Yet probably one of the biggest advantages to a SEP IRA is that you aren’t required to make a contribution every year. For instance, I am a freelance writer; if my income fluctuates and I don’t make as much money next year, I could skip my SEP contribution for 2010, with no penalty. This makes sense especially for contractors who find that their income is inconsistent from year to year, although the no catch-up contributions rule does ultimately restrict flexibility. You can also have a SEP IRA even if you are already enrolled in another employer’s pension plan. Again, using myself as an example, I work a traditional job in insurance along with my freelancing gigs, so I could have a retirement account with my employer as well as my own SEP IRA.

With so many people starting to work nontraditional jobs in addition to their regular employment, then, a SEP IRA becomes even more attractive. You can review BankShout’s article about Traditional and Roth IRAs, and look over the IRS rules for SEP IRAs here. Then feel free to comment below on your thoughts and experiences with SEP IRAs.

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