Individual Retirement Accounts

This type of account lets you make regular tax-deductible contributions, so saving for your future doesn't strain your wallet today. Your full contribution earns dividends on your behalf. With a traditional IRA, you don't pay taxes now on the money you are saving. And your money earns compounding interest. When it's time to begin drawing funds from a traditional IRA, you'll pay regular income tax on your withdrawals. Since you will be paying taxes based on the tax bracket you are in at the time of your retirement, you should consider the fact that you may be paying a higher rate than you are paying today.

Roth IRAs are favored by many tax advisors because you pay taxes on your contributions now, rather than when you begin taking deductions from it during retirement. That means you get your tax obligation out of the way. When you retire and begin withdrawing the funds, you don't pay taxes again. The implied assumption is that you're in a lower income tax bracket today than you will be when you clock out of work for the last time. However, not everyone is eligible to invest in a Roth IRA. Discuss the requirements with a tax attorney.

If you're planning a family, you're wise to consider saving for their college education early. Parents should check out the Coverdell Education Savings Account, a vehicle that lets you contribute up to $2,000 per minor per year. Yes, you'll pay taxes as the contributions go in, but the funds (and their earnings) grow tax-free while your family and the account matures. Then, when your child heads off to college, your Coverdell ESA distributions can cover many qualifying expenses.