• An IRA (Individual Retirement Account) is a savings account that is funded by an individual or the individual's employer. IRA funds are invested and grow tax-free for use upon retirement. Withdrawals of IRA funds before the age of 59 1/2 are typically penalized with higher taxes; however, all IRA account holders must begin withdrawing funds at age 70 1/2. The Internal Revenue Service (IRS) oversees the four types of IRA plans---payroll deduction IRAs, SEPs, SIMPLE IRAs and SARSEPs---and the rules by which they are governed. Employees must also meet eligibility requirements to participate.
  
  

Payroll Deduction IRA

• Employers offer a payroll deduction IRA to eligible employees. As the name suggests, an employee's contribution is conveniently deducted directly from his paycheck for deposit in the IRA. Payroll deduction IRAs consist of two types: traditional IRAs and Roth IRAs. With traditional IRAs, contributions may be tax deductible, and distributions are taxed as income when withdrawn. The opposite occurs with Roth IRAs---contributions are not tax deductible and distributions are not taxed as income when withdrawn. Contribution limits (for 2009 and 2010) are $5,000 for those under age 50, and $6,000 for those age 50 or older. Both traditional and Roth IRAs can also be set up independently from an employer at most financial institutions, creating a self-directed IRA.
  
  

SEP (Simplified Employee Pension Plan)

• SEPs are funded solely by contributions from employers; employees may not contribute to a SEP. SEPs are primarily for small employers and those who are self-employed. Employers can contribute up to 25 percent of an employee's compensation, or $49,000 (for 2009 and 2010), whichever is less. A benefit of a SEP is the higher contribution limit.
  
  

SIMPLE (Savings Incentive Match Plan for Employees) IRA

• SIMPLE IRAs are funded by contributions from both the employer and employee, and are primarily used by small employers. When setting up a SIMPLE IRA, the employer must choose the contribution level; an employee may or may not contribute to the SIMPLE IRA during the plan year. Under SIMPLE IRA plans, employees can contribute $11,500 (in 2009 and 2010). Employers can match employee contributions dollar-for-dollar up to 3 percent of the employee's income, or offer a 2 percent non-elective contribution.
  
  

SARSEP (Salary Reduction Simplified Employee Pension Plan)

• SARSEPs are plans that were set up before 1997. Although new SARSEPs can no longer be established, those set up before 1997 must allow eligible employees who were hired after 1996 to participate. SARSEPs allow employers to contribute to their own and their employee's IRAs. Employees contribute part of their pay through salary reduction to the SARSEP. Employees can contribute by salary reduction up to 25 percent of their compensation or $16,500 (for 2009 and 2010), whichever is less. SARSEPs must meet annual requirements to continue operating.