Common tax-advantaged investment programs

There are ways to put money aside that have tax advantages. Check with a plan provider to understand the eligibility rules and requirements. (See Resources for ideas about where this information can be found.) Some common programs:

Deductible Traditional IRA. You must have earned income and meet age, income or other requirements to contribute to this plan. Single persons or married couples who do not have any retirement plan at work are usually eligible. Check with the investment company to see if you qualify. Within IRS limits, amounts contributed under the plan are tax deductible and can grow free of tax until the money is withdrawn. People over 50 are generally allowed to make bigger contributions. Early withdrawals may be permitted without penalty for certain purposes such as a first-time home purchase, large medical expenses, or higher education payment.

Non-Deductible IRA. Almost anyone with earned income can contribute to this type of IRA, and the earnings grow tax free. However, contributions are not tax-deductible, and there are often other restrictions. This plan can be an effective way to supplement an employee-sponsored retirement plan.

Roth IRA. This plan basically reverses the tax treatment of a traditional IRA - current contributions are not tax deductible but withdrawals upon retirement are tax free - both to you and to your beneficiaries after you die. This is a good plan for those who expect to be in the same or higher tax bracket during retirement years as during working years. It's an effective way to pass tax-free money along to heirs. Also, you may be eligible even if you have a pension plan, and contributions may be withdrawn at any time without penalty. There are some restrictions on the withdrawals of earnings (separate from contributions).

529 Savings Plan. This is an education savings plan, where contributions can be as little as $50 per month. Interest accumulates free of taxes, until the money is used for qualified college expenses. There are penalties for withdrawals used for non-education purposes. Changes to your 529 plan can be made only once a year. Check requirements carefully with the provider.