When most people think of retirement and the government at the same time, they think of Social Security, the government program that collects money from you throughout your working life and gives it back to you, one month at a time, during your retirement years.

If you're nearing retirement, you can probably count on quite a bit of Social Security income for your retirement. If you haven't already, you will soon receive a statement that explains how much you'll receive each month, based on exactly what age you retire. You can also contact the Social Security office.

If you're 40 or younger, however, there's isn't much chance that Social Security will fully fund your retirement. That's because instead of taking income from you, investing that income, charging a small administrative fee, and then paying you benefits from the investment, as you may have expected the federal government to do, the system actually works quite differently.

The money you paid in isn't there anymore: What you paid in 10 years ago was used to pay benefits to other people 10 years ago; what you paid in last week was used to pay benefits to other people last week.

And that worked pretty well when the largest generation in American history (the baby boomers) were working, but as they near retirement, the government will probably not be able to collect enough in Social Security income to offset the benefits being paid to boomers.

As a result, the government has taken two steps: Increasing the age at which you can begin to draw Social Security benefits; and encouraging you to invest more money in your own retirement accounts to use when you retire. The following sections give you some examples of how they hope to encourage you to do that.

As you investigate all of your options, use WORKSHEET 21-3 to keep track of what's available to you and how much you're legally allowed to contribute.

WORKSHEET 21-3

Possible Retirement Savings

Type of Account	Possible Contribution	Employer Matching Amount
$	$
$	$
$	$
$	$
$	$
$	$
$	$
$	$

Traditional IRA

An individual retirement account (IRA) is a voluntary retirement savings plan. Up to certain limits, you can contribute to an IRA every year and deduct the amount of your contribution from your federal income taxes. Starting at age 59 and a half, you can withdraw funds from your IRA each month.

At that time, the money you withdraw is taxed, but because you'll probably be at a lower tax level, you'll still save tax dollars. Withdrawing the money before age 59 and a half results in substantial penalties. In addition, you must begin receiving disbursements from your traditional IRA at age 70 and a half.

As long as you're making money doing something, in 2008 you can deposit $5,000 into a traditional IRA, and that number will likely gradually go up, as it has for the last decade. However, if your income exceeds a certain level, you may not be eligible to take the tax deduction.

Consult IRS documents (or visit the IRS website) to determine those income levels for this year. You may also be limited in traditional IRA contributions if your company sponsors a retirement plan for you, even if you don't participate.

Roth IRA

A Roth IRA is a variation of a traditional IRA, but the tax benefits of the plans are in total opposition. With a Roth IRA, instead of getting a tax deduction for your contribution now and paying tax on the amount distributed to you in retirement, you get no tax deduction now, but you pay no tax on the money distributed to you later. Like a traditional IRA, you can contribute $5,000 per year in 2008.

Also like a traditional IRA, however, you can't contribute if you earn too much money ($110,000 for single incomes; $160,000 for joint incomes), and if you earn $95,000–$110,000 for singles ($150,000 and $160,000 for joint filers), the amount you can contribute is less than the full allowable amount.

A Roth IRA does have a couple of benefits over traditional IRAs, though. One is that you can continue to contribute as long as you'd like and do not have to begin taking distributions at age 70 and a half. The other is that you can contribute to a Roth IRA even if your company sponsors a retirement plan.

SEP-IRA

A Simplified Employee Pension (SEP) IRA works like a traditional IRA, but it's set up by an employer for its employees (including by you, if you're self-employed). As long as the employer does not offer another retirement plan, the employer can contribute up to 20 percent of your income (up to $45,000) into the SEP-IRA every year.

You can take the account with you when leaving the company to take another job. All of the money contributed comes from your income, but it's not taxed until you receive it during your retirement years.