The Road to Early Retirement

The idea of an early retirement is indeed an appealing one. Wouldn't you rather spend your years gardening, traveling, or spending time with family than working? Most folks wouldn't hesitate to give an unqualified "Yes!". But retiring early means having a solid financial plan in place to provide for you during retirement.

One of the easiest ways to pave the road to early retirement is through tax preferred savings and investment accounts. These are accounts that are given preferential tax treatment by the government. A great example of a tax preferred investment vehicle is Individual Retirement Accounts (IRA's). IRA's were created by the government to not only ease its burden of providing Social Security and Medicare benefits for retired persons, but also to empower individuals to make their own self directed investment choices.

There are two major types of IRA's, each with their own unique tax benefit. Contributions to Traditional IRA's reduce your taxes in the year you add money to the account (the maximum contribution in 2006 and 2007 is $4,000). However, when you withdraw the funds from this account after retirement, all monies taken out are taxed.

Roth IRA's do not generate a tax benefit in the year you make a contribution, so even though you contribute $4,000 (the maximum amount for 2006 and 2007), you won't get a tax benefit in that year. However upon retirement, all monies that are taken out are not taxed. Since the money is withdrawn tax free upon retirement, Roth IRA's thus have the potential to yield tremendous tax-free returns over long periods of time.

Setting up a Traditional IRA or Roth IRA can be done at most banks, online brokerage houses, or mutual fund companies. Search around for the best deal and do your best not to pay account maintenance fees, or other costs, as these will slowly erode your yield over time. IRA's may contain any number of financial instruments including stocks, mutual funds, bonds, even real estate or precious metals.

The Internal Revenue Service has a great publication on Retirement Accounts with additional detailed information. The following link will take you right to the IRS generated pdf file.

http://www.irs.gov/pub/irs-pdf/p590.pdf