How to Avoid the Biggest Mistakes 253 tributions even further, especially if you're considered a "highly compensated" employee (earning more than $85,000 in 2001) or are a 5-percent owner. Your company may need to restrict contri- butions from these "hi-comps" to comply with other rules designed to ensure that the plan isn't favoring the folks who make the big bucks. But you needn't worry about overfunding. Most plan administrators and record keepers keep track of these limits for you. And none of the preceding affects your ability to make an up-to-$2,000 (in 2001; up-to-$3,000 in 2002­2004) nondeductible annual contribution to your IRA, other than being able to come up with the money, that is. Investing Question #4:I'm self-employed and want to set up a tax-deferred savings account. My business is a sole proprietorship, and I'm the only employee. Which plan would be better for me, a SEP or a SIMPLE 401(k)? Answer:Given what you've said--sole proprietor, only employee--we might suggest something different, a Keogh. A SIMPLE (Savings Incentive Match Plan for Employees) 401(k) or SIMPLE IRA will limit you to a $6,500 per year annual contribution, although this amount will go up because of changes to the law and indexing. A Keogh could be structured to allow you to contribute up to 25 percent of your self-employment income or $35,000, whichever is less. And it could be designed as either a defined-benefit or defined-contribution plan. But it will require IRS reporting annually--the price you pay for being allowed to contribute more than the other plans. A SEP (Simplified Employee Pension) is an IRA that will allow you to contribute 15 percent of com- pensation or $25,000 whichever is less. In fact, you can structure a SEP so it can function pretty much like other qualified plans. Our Advice Figuring out what to do when you are self-employed is dicey and involves much more than just setting up a retirement program for yourself. We would advise seeking the counsel of a CPA or tax attorney. They can help you determine which course of action is best, given where you are today and where you hope to be tomorrow. (Check out Chapter 21 as well.) Investing Question #5:Why are limits on contributions to tax-sheltered annuities--403(b)retirement plans for schools and hospitals--lower than the limits for 401(k) employees? It seems unfair that people don't get the same tax benefits. Answer:Actually, participants in both 401(k) and 403(b) plans can contribute up to $10,500 on a pre-tax basis (in 2001; $11,500 in 2002). And in prior years, 403(b) participants could actually con- tribute more than their 401(k) counterparts. Prior to 1997, 401(k) plans did enjoy some administrative advantages, like the frequency of changing a contribution rate and certain definitions of compen- sation. However, that's all changed. The Small Business Jobs Protection Act of 1996 contained some legislation that puts 403(b) plans on a similar plane with 401(k) plans, and legislation that takes effect in 2002 erased the major remaining difference--401(k) participants will be able to make "catch up" contributions just like 403(b) participants. In fact, nonprofit employers can now offer 401(k) plans. We suggest you check with your employer to make certain that your plan reflects the changes allowed under current law.