401(k)s

Saving for retirement might seem like an uphill battle, but there are many things you can do that both make the process easier and allow your assets to build more quickly. For example, you may have the option of saving for retirement through an employer sponsored retirement plan, such as a 401(k). These plans are also known as salary reduction plans, since you can defer a certain amount of your pretax salary into your retirement account. You take home a little less, but you postpone income tax on the amount you put into your account. So you have the double advantage of saving money on taxes now and building your retirement account for the future.

Both the money you put into the account and any earnings it produces are tax deferred until you withdraw, usually in retirement. Tax deferral means your account has the potential to compound faster, since you don't have to take out any of your earnings to pay annual income taxes.

Portable plans

Another big advantage of a 401(k) and other salary reduction plans is their portability. That means that when you leave your job for any reason, you have the right to move the contributions you've made to your account plus any earnings to a new employer's plan — if the plan accepts transfers — or to an IRA. While you may have the option to leave your account with your former employer, at least for a while, being able to transfer the money to a new account has some potential advantages:

• You may have more control over how your savings are invested
• You don't risk losing track of your savings
• You have a bigger base of money to invest if you consolidate your accounts, which may entitle you to additional benefits from the new trustee of your transferred accounts

You do have the right to withdraw the money you've contributed to a 401(k) when you leave your job, but that's usually not the best choice. You'll owe income tax on the total amount you withdraw, plus a 10% federal tax penalty if you're younger than 59 1/2. And you have to start all over again to accumulate retirement savings. The better plan is to keep the money invested in a tax-deferred account to help achieve your original goal — funding your retirement.