My employer wants to pay me retirment benefits of $625 (pretax dollars) a month. They are willing to direct it to any invetsnment I choose or to pay me cash. They do NOT have an employer sponsored 401K plan.

My question is whether I can have them funnel the moneys into an investment or retirement account without my paying taxes on it?

It seems not. As of right now my only option is to report it as income, pay taxes on it and put the post tax amount into a Roth IRA ($4000). Not sure what I would or should do with the excess amount ($3500).

In order to fund any IRA (traditional, Roth, SEP, whatever), you must have EARNED income. Retirement pay does not count as earned income.

Sorry, I misspoke. I am 30 years old and the $7500 a year is supposed to take place of what other folks get towards their 401K. My employer is small so he doesn't have a formal 401K. I am an employee so I can't establish a 401K for self-employed persons (or can I?).

Have your emploer look at a SIMPLE plan. They are so easy to set up that virtually ANY employer can use them.

You can fund your ROTH IRA (which is funded with after-tax money) or a traditional IRA (funded with before-tax money) on your own.