If you run your own business and plan to stay small, a Simplified Employee Pension (SEP) IRA is one of your best options for retirement savings. These retirement plans are extremely popular with sole proprietors, allow for considerable annual contributions, and are easy to establish. You can go online with almost any brokerage firm, bank or asset manager like Fidelity or Vanguard and open an account with no fuss. Annual fees are typically low, and the account holder pays a set fee for making trades.

The contribution limit is very generous, particularly compared to Roth and traditional IRAs. Salt away as much as 25% of net income up to $55,000 for 2018. If you're over 50, you can also make a catch-up contribution of an additional $6,000 per year, bringing the total annual contribution up to $60,000. This cap increases regularly to account for inflation. The $55,000 limit is an increase of $1,000 compared to 2017. This follows a continuing trend among SEP IRAs, which have raised maximum contributions for the past two years, making them even more valuable and appealing. The $55,000 limit is impressive compared to other types of retirement plans, as well, which have much lower maximum contribution limits.

If you're planning to establish a SEP IRA, you should do it by April 15 for the previous tax year. Funding is very flexible, and you don't need to fund the plan until you are ready to file your taxes. This way, if you enjoy the happy surprise of earning more money than you anticipated, you can up your contribution and reduce your tax bill accordingly. In leaner times, you can reduce your contribution.

When it comes to making contributions for employees, you will be the only one doing so. In this plan, employees don't contribute. If an employee is age 21 or older, has worked for you in three of the past five years, and receives at least $600 in annual salary, they are eligible for inclusion in the plan. This is where the downside comes in. This can become an expensive proposition if you have more than a few employees. While you don't have to fund contributions every year, you're obligated to do so each year you contribute to your own account, and you must do so in an equal amount for every person you employ.

As with traditional IRAs, there are strict rules about withdrawals and distributions. While you can take distributions at any time, the distribution is included in taxable income and could be subject to an additional 10% penalty if you are younger than 59½.  There are certain exceptions that will allow you to avoid paying the penalty, though. For example, if you use the withdrawal for medical expenses not covered by insurance and exceeding 10% of your adjusted gross income, no penalty will be assessed. For a complete list of exclusions, you can refer to IRS Publication 560. When you reach age 70 ½, you will be required to take the required minimum distribution from the account every year.

SEP IRA plans are becoming more popular each year. With the increase in the contribution limit in 2018, they are expected to become even more common, including among small businesses. SEP IRA limits have increased for the past two consecutive years, a trend businesses and investors have definitely taken note of. The limit is particularly high when you compare a SEP IRA to other types of retirement plans, most of which have a lower limit.

SEP IRAs also have lasting appeal because of their simplicity. Small business owners like SEP IRAs because they are not complicated and obtuse. The reporting requirements on a small business owner are not as onerous when it comes to SEP IRAs compared with many other types of retirement accounts. Overall, they benefit both the small business and its employees due to high limits and convenience.

This article was updated March 5, 2018

Editor's Note: Looking for Employee Retirement Plans for your company? If you would like information to help you choose the one that's right for you, use the questionnaire below to have our partner, BuyerZone, provide you with information for free:

Editor's Note: Looking for Employee Retirement Plans for your company? If you would like information to help you choose the one that's right for you, use the questionnaire below to have our partner, BuyerZone, provide you with information for free:

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