The IRS understands that you need to save for retirement. Often your nest egg builds faster if you don't have to pay taxes on retirement savings until you are ready to retire and withdraw your money. The idea is that you will be in a lower tax bracket once you retire. The money is taxed as it is withdrawn.
Retirement accounts through your employer, such as 401(k)s and company sponsored IRAs, give you added benefits. Your contributions to your account are made in pretax dollars, which means that you are saving more than if you only contributed after-tax dollars. Because you deduct your contributions from your gross income, you are paying less in taxes.
There are other accounts, such as Roth IRAs, that allow you to contribute after-tax dollars. Your earnings grow tax free because you've already paid the taxes on your contribution. When you withdraw the money, you don't have to pay any taxes.
There are several tax-advantaged retirement plans to help you save for your future.
Individual Retirement Accounts
Individual Retirement Accounts (IRAs) give you a great way to build tax-deferred savings for your retirement. An IRA is not an investment, it is an account. Within the account is a mixture of the investments that you want - stocks, CDs, mutual funds, cash and bonds. You can have any mixture of investments you want, and everything except options and other derivatives.
Employees can no longer plan for their future based on the promise of Social Security and pension plans. As corporate America has switched to "defined contribution" retirement plans, the American worker is on his own for saving for retirement.
"Defined contribution" plans specify the maximum amount an employee can contribute to a plan, but they do not guarantee any amount of payout. A "defined benefit" means that the company's plan guarantees a specific payout. In general, the burden of funding your retirement is no longer with an employer, but with you.
The Traditional IRA
The traditional IRA is the most popular form of an IRA. Anyone under the age of 70