Then when the tax is calculated, it is done so on the remaining amount of the paycheck. Therefore, if your paycheck is for $1000 per week, and you divert $100 each pay period to your retirement account, you are only taxed on the remaining $900, thus lowering your taxable income and tax due.
This year, the federal government has increased the amount of money you can invest in a 401(k), 403(b), and 457 to $11,000 per year. This number will continue to increase until the year 2006, when it reaches $15,000 per year. Therefore, you could potentially reduce your taxable income by up to $11,000 this year!
SEPs, or simplified employee pension plans, are retirement plans that use IRAs or IRA Annuities as the receptacle for contri- butions. SEPs are often attractive to small business owners because of the reduced administrative tasks and expenses. Docu- mentation, reporting, and disclosure requirements are simpler for SEPs than for qualified plans. However, in exchange for simplic- ity is the loss of flexibility. For example, under an SEP, all employ- ees must be covered as long as they meet specified requirements, and the benefits must be fully vested at all times. SEPs allow employers to make contributions to an employee’s retirement with- out utilizing a more complicated retirement plan, like a 401(k). You can use SEPs if you are incorporated or if you have self- employment income, so check with your CPA to see if you qualify to establish a SEP.
From a design perspective, the SEP is quite similar to the profit-sharing plan. The plan may also allow employees to make pretax salary deferrals, like in a 401(k) plan. The maximum employer contribution to the SEP is 25 percent of the compensa- tion of all employees eligible to participate in the plan. If an employer sponsors several profit-sharing plans and SEPs, all plans are aggregated under this rule. The maximum amount that can be allocated to each participant from employer and employee contri- butions is the lesser of 100% compensation or $40,000 (indexed