If you’re saving for retirement, there are some tax-advantaged alternatives that can help you reach your financial goals:

401 (k) Plans and 403 (b) Plans

Most employers offer tax-deferred retirement plans to their employees. For-profit businesses offer 401(k) plans, which are probably the most widely-known.    Non-profits, schools and universities offer a similar plan called a 403(b). Both the 401(k) and the 403(b) are called “salary reduction plans.”  Here is how they work:

You are allowed to deposit a pre-determined amount into a special account, without paying state or federal income tax on it.  The deposit is withdrawn automatically from your paycheck, so it seems almost painless.

In addition, employers have the option of “matching” some or all of your contribution, as an incentive to encourage you to save.

Depending on the plan your employer provides, you will have your choice of investment options, such as mutual funds and index funds.

There is a limit, however, on the amount you are allowed to contribute to a 401(k) or 403(b) plan.  The limit is $16,500 for 2009.  If you are age 50 or over, an additional “catch-up” contribution is allowed.  The additional contribution amount is $5,500 in 2009.

While you don’t pay tax on the money now, you do pay income taxes when you withdraw your savings in retirement. If you are in a lower tax bracket during retirement, which is often the case, you’ll end up paying less in taxes than you would have if you hadn’t deferred the payment.

Pay outs may be taken in a lump sum or in monthly withdrawals.  There are penalties for early withdrawal before age 59 ½, and you must begin to withdraw by age 70½.

To get started, you need to speak with someone in human resources department or payroll to arrange how much you want withdrawn from your paychecks, and to look over your investment choices.

To learn more about 401(k)’s check out the IRS overview.

Individual Retirement Accounts

An individual retirement account, or IRA, is another tax-advantaged way to save for your golden years.  You have two primary options: a traditional IRA or a Roth IRA.

• Traditional IRA

  You may contribute up to $5,000 annually to a traditional IRA. 
  Your contributions are made with pre-tax dollars.  Your contributions grow tax deferred.  In other words, the earnings in a traditional IRA are not taxed until they are withdrawn.   There are no income limits so everyone is eligible.

  There are penalties if you make withdrawals before you are at least 59 ½.  If you are age 50 or older, your annual contribution limit is $6,000.

• Roth IRA

  If you are eligible, a Roth IRA is a beautiful thing. Like a traditional IRA, you may contribute up to $5,000 annually.  With a Roth IRA, however, you contribute after-tax dollars.

  The big advantage of the Roth is that funds contributed to a Roth IRA grow tax free.  You may withdraw those funds tax free after age 59 ½.

  There are stiff penalties for early withdrawals from IRAs, but Roth IRA contributions can be withdrawn without penalty for a few specific uses. If you are buying your first home, paying for higher education, or have certain kinds of medical expenses, you can use funds from a Roth IRA without paying the usual penalties.

  So with all these advantages, doesn’t the Roth IRA sound too good to be true?   Well, it is true, at least if you’re eligible. If you make over a certain amount of money, you’re stuck with regular 401(k) or traditional IRA. In 2008 the maximum income for a Roth IRA was $116,000 if you’re single, and $169,000 if you’re married.

To learn more about both types of IRA, check out the IRS overview.

Why Pay More in Taxes?
The 401(k), 403(b) and the IRAs are all “shells” where you can store your savings and make investment choices. These accounts allow you to invest for the future and build a foundation for a comfortable and secure retirement. If you’re not already saving for retirement, there’s no better time to start.