Is it ironic that the biggest casualty of this bear market is Bear Sterns? Stocks are tanking still, and it's time to open our pocketbooks. The government is pushing for Americans to optimize individual savings accounts because they continue to spend the excess Social Security money on..."international interests." The most popular governmental incentive in place is the Individual Retirement Account (IRA) and is a terrific way to plan for your retirement. If you start saving early enough, you may one day be able to afford that bungalow in the democratic Baghdad resort we've worked so hard to make.

But what exactly is an IRA? Basically, it's a program set up by the government that is trying to encourage citizens to take responsibility for their own future by investing in stocks, bonds, etc at tax advantageous rates. Contributions towards an IRA ($5,000 limit in 2008) will result in a dollar for dollar deduction on your income tax return. It sounds great, but you have to remember that you have to wait until you are almost 60 (59 ?) to withdraw funds without penalty. Please note, however, that capital gains earned at disbursement will be taxable, so watch out for that.

Another retirement option we have is the IRA's cousin, Roth IRA. Unlike the traditional IRA, the taxes on the Roth IRA are paid up front, so the capital gains earned by the time of distribution are income tax exempt. However, unlike the Roth IRA, there is no deduction on initial contribution. Also, at any time, the Roth IRA investor may withdraw funds from their contribution without tax or penalty.

Both accounts sound pretty decent, but which one is better? The account with the greatest near-term benefits (Traditional IRA- contribution deduction) or the longer-term benefit (Roth IRA- no tax on distribution)? Let's crank the numbers! We'll take identical clients, both 50 years old, earns 10% interest a year, and decides to let his account mature for another 10 years (to ensure his traditional IRA distribution will not be penalized). Here are the results:

Traditional IRA
5,000 contribution (10% growth over 10 years) = 12,969 * 28% tax rate = $3,613 taxes

$9,356 save

Roth IRA
5,000 contribution * 28% tax rate = $1,400 taxes
5,000 contribution (10% growth over 10 years) = 12,969 - 1,400 taxes $11,569 save

The numbers have it... Long-term wins again! The main lesson today is that if you have enough money to pay the taxes up front, you will win in the long run. If you don't have the cash, a traditional IRA is a viable alternative (and you can always convert down the road). It's retirement made easy- now you just have to figure out how to live that long.