6. Tax-deferred retirement plansSEPs, SIMPLE plans. The IRS provides incentives for self-employed individuals and small companies to help their employees save for retirement through SEP (simplified employee pension) plans, SEP 401(k)s and SIMPLE (savings incentive match plan for employees) plans.
The contribution amounts are generally much higher than with IRAs and are usually tax-deductible.
For example, the maximum contribution to a SEP-IRA in 2008 is 25 percent of compensation or $46,000, whichever is less. The annual compensation limit for 2008 is $230,000.
SEP 401(k)s offer similar benefits. For 2008, you can defer up to $15,500 in pretax income. If you're older than 50, you can save up to $20,500. You also can save an additional 25 percent of your compensation for a total $46,000 (or $51,000 if age 50 or older).
Contributions to SIMPLE plans max out at $10,500.
"SEPs are exciting because they are a great opportunity for small businesses with little or no employees," says George Saenz, a certified public accountant and Bankrate's "Tax Talk" expert.
Saenz says the government essentially pays these taxpayers to save money and put it in their own pockets, "so part of your immediate return is not so much the amount that's invested. It's the 30 to 35 percent tax that you get to save right away."
401(k) plans. According to the most recent statistics the U.S. Department of Labor provided, almost 64 million Americans have 401(k) plans. That's a lot of people taking advantage of a tax-deferred retirement plan.
With 401(k) plans, employees contribute a portion of their wages on a pretax basis. That means the deferred wages are not subject to income tax withholding.
These plans are an increasingly common way to save for retirement now that fewer companies are offering defined benefit plans, or traditional pensions.
At many companies, employers match a certain percentage of your contributions to a 401(k) plan; in essence your employer gives you free money toward your retirement.
"If you have a job where an employer offers a 401(k), put (enough) money into it to at least meet their match," says Kay Bell, a tax expert who writes Bankrate's "Eye on the IRS" blog. "If you don't, you're just leaving money on the table."
The money you contribute toward your 401(k) plan reduces your taxable income at the end of the year and generally is not taxed until you take a distribution upon retirement.
Distributions received before age 59 1/2 are subject to an early distribution penalty tax of 10 percent unless a qualified exception applies.
If you leave your company and decide to take a lump sum distribution from your 401(k) instead of rolling it over, you will be subject to a 20 percent withholding tax.
Contribution amounts vary based on how much employees elect to defer into their 401(k) plan and limits based on the terms of your 401(k) plan. The limit on elective deferrals is $15,500 for 2008 with an additional catch-up contribution limit of $5,000 per year for those 50 years of age or older.