Only income from an approved business can be contributed to a SEP/IRA; money earned from other employment may not be used. In addition, while a SEP/IRA may be the right option for some self-employed people, the IRS limits who can participate. Specifically, one cannot be a "common-law" employee. That is, according to the IRS: A common-law employee is a person who performs services for an employer who has the right to control and direct the results of the work and the way in which it is done.

So someone who is a common law employee in one company can also be a sole proprietor qualified for a SEP/IRA. But the difference must be clearly understood (and documented) as only income from the qualifying business may be contributed to a SEP/IRA. What's more, the IRS does not permit loans to be taken out against SEP account balances, a feature of 401(k) plans that provides business owners with a valuable semi-liquidity option.

Who Should Have a SEP or Sep/IRA? Employees are eligible to participate in a SEP/IRA if they are at least 21 years old, have worked for the company in three of the last five years, and received at least $550 in compensation during the year. Employers don't have to make SEP fund contributions every year, but when they choose to make contributions, they must contribute not only to their own SEP, but to the SEP/IRAs of every eligible employee.

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