A simplified employee pension IRA is a type of traditional IRA that is designed for self-employed individuals or small business owners. For the most part, SEP IRAs and traditional IRAs are similar. However, when it comes to contributions, there are some major differences between the two. Not only is the maximum contribution amount different but who can contribute to the IRA differs between a SEP IRA and a traditional IRA.

Who Can Establish The Account

Anyone can open a traditional IRA to save money for retirement. The contributions you make to your traditional IRA may be tax deductible, but the deduction amount varies based on whether you or your spouse is covered by an employer-offered retirement plan and the amount of your annual income.

Only an employer – or sole proprietor – can open and contribute money to a SEP IRA, and because you don’t contribute any payments, you can't claim any tax deductions. However, your employer is allowed to claim business-related tax deductions for contributions made on behalf of employees. If you are self-employed or you do freelance work, you can contribute to your own SEP IRA and may be eligible for the tax deductions.

How Much Can Be Contributed

The amount of money that you can contribute to a SEP IRA and a traditional IRA is drastically different. As of 2014, you can contribute up to $5,500 ($6,500 if you’re over age 50) to a traditional IRA. The maximum contribution amount is the total annual amount that you can contribute between all of the traditional IRAs and Roth IRAs that you own, so, if you have a traditional IRA and a Roth IRA and you’re under 50, your total contributions between the two accounts cannot exceed $5,500.

SEP IRAs have more generous contribution amounts. As of 2014, the maximum amount that you can contribute to a SEP IRA is up to 25% of your (or your employee’s) gross income or $52,000, whichever is less. Also, your SEP IRA contribution does not count towards the annual traditional or Roth contribution limits, so, someone with a SEP IRA can also contribute the maximum contribution amount into a traditional IRA.