The Power of Tax-Deferred Savings

Editor's note: As a special feature for April, TheStreet.com is offering a seven-part series on maximizing your IRA. This installment is Part 1. Click here for Part 2, Part 3, Part 4, Part 5, Part 6 and Part 7.

Americans are terrible savers, and most people approaching retirement age don't have enough assets to maintain a comfortable lifestyle once they leave the workforce.

Add to this the potential looming problems with Social Security and Medicare and you can see that any attempt to save for retirement is probably a good thing.

IRAs and other retirement plans give the investor a great advantage -- tax-free or tax-deferred savings. Over long time periods, this can really boost wealth creation. For example, a portfolio growing at 10% a year that isn't taxed will grow substantially faster than a taxed portfolio growing at the same rate. If the tax rate on a portfolio's return is 25%, the portfolio will be 25% bigger after 10 years if it is not taxed.

Traditional IRAs have the added advantage that contributions to it are not subject to tax if your income falls below a certain threshold. This gives investors the ability to use money that would otherwise go to the government to partially finance their own retirement portfolios. The higher the tax rate, the better the bargain for the traditional IRA investor.

While withdrawals from traditional IRAs are taxed at ordinary income tax rates, many people are in lower income tax brackets when they retire than when they're in the workforce. If your income is low enough (less than $50,000 for joint filers for 2006), Uncle Sam may give you a direct credit on income tax of up to $1,000 if you invest $2,000 in an IRA.

One critical requirement for contributing to an IRA is that the IRA's owner must have earned income. If you spend most of your time sitting on the veranda clipping municipal bond coupons and adding up your oil and gas royalty checks, you probably won't qualify. Then again, you probably won't need one.