(MONEY Magazine) – Perhaps the most overlooked winners under last year's tax reform are small business owners. Consider 45-year-old attorney Michael Marsalese, a sole practitioner in Bloomfield Hills, Mich. For the past four years, he's needed two tax-deferred plans--a profit-sharing Keogh and a money-purchase Keogh--to accommodate all the money he wanted to save for retirement. In January, he was able to eliminate his money-purchase plan, a move that gives him more control over his contributions. And he saw the amount he could save tax-free rise substantially. With his paired plans, Marsalese was able to save $35,000 in 2001; this year, he can invest $40,000 in his profit-sharing plan alone.

The new tax law not only lets small business owners and the self-employed save more for retirement, it also makes planning somewhat easier. "If you're a self-employed person who has neglected your retirement in the past, the tax law is really good for you," says Nicholas Kaster, a senior analyst at the tax-law publisher CCH. "There really is no excuse not to sock away for retirement." One new perk: People who work on their own and small business owners with fewer than 100 employees can qualify for a new tax credit of up to $500 toward the cost of establishing a retirement plan. Here's how the tax law has affected the most popular retirement plans for the self-employed, starting with the simplest.

A Simple IRA remains the easiest, cheapest way to stash retirement funds into a tax-sheltered account. This year, you can put up to $7,000 in a Simple IRA--$7,500 if you're 50 or older--up from $6,500 in 2001. The limit will rise to $11,500 by 2005. As with a traditional IRA, contributions are deductible and earnings grow tax-free. Note: If you have employees, you generally must match their contributions up to 3% (certain workers can be excluded).

If you want to save far more, your choice now comes down to a SEP-IRA (simplified employee pension IRA) or a profit-sharing Keogh. Both plans let you save up to $40,000 this year--in theory, at least. When lawmakers passed the tax cut last spring, they increased the SEP deduction to 20% of self-employment income (25% if you're an employee), up to $40,000. But in a technical oversight, Congress didn't raise the contribution limit. Until the mistake is corrected, notes Kaster, "the SEP contribution limit effectively remains at 15%."

As long as you don't expect to save more than 15% of your compensation, stick with the SEP--the plan is easier to maintain and in certain ways more flexible than a Keogh. For example, you have until the tax-filing deadline, including extensions, to establish and fund a SEP. You must set up a Keogh by Dec. 31 of the year for which you're making a contribution, although you have until the tax-filing deadline to fund it. And SEPs don't have annual IRS filing requirements. (Keoghs, on the other hand, give small business owners more flexibility in setting up a retirement plan for an entire staff.)

For heavy savers like Michael Marsalese, a profit-sharing Keogh is the best choice. You can now contribute--and deduct--as much as 25% of compensation or $40,000 a year, whichever is less. That's up from 15%, or $25,500. The old lower limit meant that, like Marsalese, small business owners often opened a money-purchase Keogh as well to save more. Tax reform, notes Southfield, Mich. financial planner Tim Wyman, "pretty much made the money-purchase plan obsolete." A profit-sharing Keogh is much less restrictive than a money-purchase one--you don't have to put in a specified amount every year. That flexibility suits Marsalese fine. Though he could be saving even more money for retirement, he has another agenda. He and his wife Christine, 41, earmark about $10,000 a year for each of their two sons' education.

--ERICA GARCIA AND LESLIE HAGGIN GEARY