Investing in a tax-deferred retirement plan is an effective way for you to save money. It's actually a double savings because you're not only saving for retirement; you're also saving money on taxes. With a tax deferral, you pay the tax later. In the case of a tax-deferred retirement plan, you don't pay taxes on the money until you withdraw it at your retirement. The taxes are typically lower than when you're working because you're usually in a lower tax bracket after retirement. In most situations, the government allows you to reduce your taxable income by the amount of your contribution to a tax-deferred retirement plan. In effect, you're investing the money that would have gone to the government.

The most common tax-deferred investment is this employer-sponsored retirement plan. With this type of account:

• Contributions are deducted from your pay pre-tax, before your income is taxed
• Many employers match some or all of your contribution, which increases the amount in your retirement fund
• You can typically borrow against the balance of your account without paying an early withdrawal penalty

Check with your Human Resources/Benefits Department for more information on this option.

Whether or not your employer offers a 410(k), you might want to invest in a Traditional IRA, or Individual Retirement Account. Features of this type of account include:

• You must be under age 70½ and have earned an income to open this account
• You and your spouse can contribute up to a maximum of $2,000 per year per person
• You may be able to deduct the amount of your contributions, based on your income
• Early withdrawal prior to age 59½ results in a 10% penalty
• Withdrawals can be penalty free if used to pay for higher education or a first-time home

A relatively new option for tax-deferred retirement savings, the Roth IRA was created by the 1997 Taxpayer Relief Act to help low- to middle-income people save for retirement. Primary differences between it and a Traditional IRA include:

• You may not open this account with an income over $95,000 if you're single, or over $150,000 for a married couple who files taxes jointly
• Contributions are not deductible
• Withdrawals after age 59½ are only penalty free if they are done at least five years after the first contribution

A Keogh is a tax-deferred retirement plan for small businesses. You may only contribute the lesser of 25% of your income or $30,000 per year. If you are the business owner, you must also contribute for your eligible employees.

Other tax-deferred retirement plans include:

• SEP-IRA - Simplified Employee Pension Plan
• SIMPLE-IRA - Savings Incentive Match Plan for Employees

These plans are basically the same as a Keogh, but they have different administrative requirements for your employer.

There are investment options where you can earn interest tax-free. In other words, the interest income, or the earnings on your investment, is exempt from some forms of income tax.

Investing in an EIRA for your child's college education gives you the benefit of a tax-deferred investment until the funds are withdrawn. The benefit to your child is withdrawals are tax free if the educational expenses for the year are equal to, or exceed, the amount of the withdrawal.

- State or local governments issue municipal bonds for the purpose of earning money to repay debt. This investment is generally recommended for individuals in a higher tax bracket because the tax exemption is worth more to someone in a higher tax bracket. The interest earned is tax exempt from federal income tax, and may be exempt from state income tax if the bond is issued in your state of residence.

- While the interest earned is subject to federal income tax, it is tax exempt from state and local income tax.

With the tax-deferred investment options listed above, you'll not only save money for retirement, you'll also save money on your taxes. The tax-exempt investment options allow you to maximize your investment income by eliminating the tax penalty. Both are good investment options to consider.