Saving for retirement is a life-long activity. Saving as much as you can now will pay off with lower taxes now, and more assets for retirement later. There are a variety of tax-sheltered plans you can use to accumulate savings for retirement. Each plan has its own unique set of rules for determining what is considered taxable income in retirement. Let's begin with a run down of the basic retirement plans that every taxpayer needs to know about.
Individual Retirement Accounts are a great way to save for retirement, and any taxpayer with earned income (from wages or self-employment) can fund an IRA. Your IRA contributions may be tax-deductible. There are Traditional (deductible), Roth, and non-deductible IRAs. Which one is best for you depends on your income, whether you are covered by a group retirement plan at work, and whether you prefer a tax deduction now or tax-free income in retirement.
Employers often provide 401(k) savings plans as a benefit for employees. Participants can save up to $17,500 per year in tax-deferred contributions. Every dollar you contribute reduces your taxable wages, thereby lowering your taxes. (The limit is $23,000 per year if you are age 50 or older.) Employer often provide matching funds, helping employees to grow their retirement savings faster. Maxing out your 401(k) is a great first-step to ensuring you are saving enough to retire.