• Social Security was intended to be a supplemental retirement income. Many companies have abandoned employee pension plans, or people change jobs too often to earn an employer pension. Retirement planning requires more self-reliance, but the government offers several tax incentives and advantages intended to help make saving for retirement easier.
  
  

401K Tax Advantages

• 401K plans are offered through employers, or you can set up a self-employed 401K if you work for yourself or run your own business. You can contribute to a 401K with pre-tax dollars, which means if you make $50,000 and you contribute $5,000 to a 401K, your taxable income drops to $45,000, saving you money in taxes and allowing you to invest more easily for retirement. Your money in a 401K also grows tax-free -- no capital gains taxes if your investments make money. You do pay taxes when you begin drawing from the account, but as long as you wait until retirement age (59 1/2), distributions are taxed as regular income. Of course, if you take it out before 59 1/2, you'll face taxes and penalties.
  
  

Traditional IRA Tax Advantages

• Like a 401K, you can also contribute to a traditional IRA with pre-tax dollars. The money in an IRA also grows without taxes, until you begin taking distributions. However, you are limited in how much you can contribute to an IRA (in 2010, the limit is $5,000 per person per year if you are under 50) and if your income is too high, you may not be able to contribute at all. The IRS mandates that you begin taking IRA distributions at age 70, and when you take money out, it is taxed as ordinary income.
  
  

Roth IRA Tax Advantages

• Unlike the 401K and IRA plans, with a Roth IRA, you invest with post-tax dollars. However, money grows tax-free and you can take money out without paying taxes. This means if you are an investment guru and turn a $5,000 investment into $100,000, you can take the $100,000 out tax-free (as long as you follow distribution rules and don't begin taking money out until 59 1/2 years of age.) Like a standard IRA, there are annual contribution limits ($5,000 as of 2010) and upper-income limits that make you ineligible to contribute.