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A SARSEP-IRA, or SAlary Reduction SEP-IRA, is a tax-deferred retirement plan provided by sole proprietors or small businesses with fewer than 25 employees. Contributions are made by both the employee and the employer. In a SARSEP-IRA, contributions and the investment earnings grow tax-deferred until withdrawal (assumed to be retirement), at which time they are taxed as ordinary income.

SARSEP-IRAs are subject to the same rules as a regular IRA. Employers can offer both SEP-IRAs and SARSEP-IRAs to employees, who in turn are allowed to invest in regular IRAs as well.

New SARSEP-IRAs couldn't be established after December 31, 1996. They were replaced by the Savings Incentive Match Plan for Employees IRA, or SIMPLE-IRA.

An employee may make an elective deferral of the lesser of the following amounts:

  1. 25% of compensation (limited to $230,000 for 2007 and $240,000 for 2008) or
  2. $15,500 for 2007 and 2008.

Employees age 50 or over can make a catch-up contribution of up to $5,000 for 2007 and 2008, which is above the limits imposed in items (1) and (2) above.

The $15,500 limit applies to the total elective deferrals an employee makes for the year to the SARSEP and any 401(k) plan or 403(b) tax-sheltered annuity plan.

Employers may make non-elective contributions to the SEP-IRAs of your employees subject to an annual addition limit. The annual addition limit is the lesser of 100% of the employee's compensation (limited to $230,000 for 2007, $240,000 for 2008) or $45,000 for 2007 ($46,000 for 2008).

For more information on these plans, consult the IRS frequently asked questions.

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