It is up to you to plan for your retirement. Thankfully, the government has given us some nice tools to help plan our retirement and get some nice tax breaks in the process. These retirement accounts often work in conjunction with Social Security and with each other, giving you several options for retirement saving.
Traditional and Roth IRAs. IRA tax benefits vary depending on which IRA plan you use and your income level. Traditional IRAs are a tax deferred retirement account. You make a tax deductible contribution now, invest the money until retirement age, and the money is taxed when it is withdrawn. With a Roth IRA you make contributions with after tax funds and take tax free withdrawals when you are eligible. The benefit of both plans is your money grows for years or even decades without the drag of taxes diminishing your returns each year. Workers with incomes below certain levels can contribute up to $5,000 to an IRA in 2010 and those age 50 and older can save $6,000.
Employer sponsored retirement plans. Many companies now offer 401(k) plans and similar retirement accounts. Popular employer sponsored plans include the Thrift Savings Plan for government employees, 403(b)s, 457(b)s, and various self-employed retirement plans. Most of these plans function similarly to a traditional IRA, with a tax deductible contribution and a taxable withdrawal. But some plans now offer a Roth version in addition to the traditional version.
An additional benefit of employer sponsored plans is the possibility of matching contributions. Not all employers provide matching contributions, but many do. You should almost always contribute as much as you can to take advantage of the matching funds. In the case of self-employed individuals, matching contributions may allow you to shelter more of your income from taxes.
Paying taxes is inevitable, but retirement planning is one of the few times you have some control over how and when you pay them. Use the tax laws to your advantage and you can set yourself up for a more comfortable and prosperous retirement.