Qualified retirement savings plans grow more quickly, because of tax-deferred compounding. Just like compounded interest, your original investment grows in value as does the return on your investment. Even better, taxes don’t eat way at your nest egg which will hopefully become gigantic over the years.

Most tax-sheltered retirement accounts require that you reach the magic age of 59½ before taking out your money. Otherwise, you pay a premature distribution penalty, unless you meet certain conditions. This penalty might be 10 percent of the amount withdrawn, plus any taxes that are owed.

The beauty of tax-sheltered retirement savings accounts is that they give you an incentive to invest for retirement. You either get a tax break now or down the road. Since putting away more money in a 401(k) saves you taxes, your take-home pay won’t be too much lower, even though you’re contributing to a retirement savings plan.

There’s also a Retirement Savings Contributions Credit that gives you an additional tax incentive to contribute to an IRA or 401(k). If you qualify, you receive a tax credit of up to 50 percent of amounts contributed to an IRA or 401(k). A tax credit reduces your taxes more than a tax deduction. The credit can’t be used by full time students or someone who is claimed as a dependent on someone else’s return.

Withdrawal Rules >>