Pre-Tax Dollars

• Funding your pension plan or individualized retirement account (IRA) with pre-tax dollars is the only way to secure an immediate tax break on your federal taxes based solely on your retirement contributions. By funneling a percentage of your salary into your retirement account before the government takes taxes out, you lower your overall taxable income, which nets you a savings at the end of the year. You don't pay taxes on these retirement funds until the account matures and you begin drawing payments.
  
  

Post-Tax Dollars

• Some retirement accounts, including Roth IRAs, receive contributions from post-tax dollars. This means the federal and state governments have already taken applicable taxes, including Social Security deductions and general income tax withholding, out of the wages used to fund the accounts. This means you won't get the immediate tax benefit for your contributions since these count toward your overall income. The sacrifice of immediate tax benefits allows you to draw funds from these retirement accounts tax free at maturation because you already made the appropriate payments to the government.
  
  

Retirement Savings Contributions Credit

• The Retirement Savings Contribution Credit allows you to receive a tax break based on your contributions to an employer-funded pension or private retirement account. The IRS allows you a credit of up to $1,000 if you're single or $2,000 if married and filing a joint return. To receive this credit your income may not exceed $27,750 if you're single, $41,625 if you file taxes as head of household or $55,500 if married and filing jointly. A credit is better than a deduction because it directly reduces your taxes owed as opposed to a deduction, which only lowers your income.
  
  

Maximum Retirement Contributions

• The federal government limits the amount you may contribute each year to your IRA. As of the 2010 tax year, you may contribute up to $5,000 annually if you're under 50 years old and up to $6,000 annually if you're over 50 years old. Additionally, only a portion of your total contributions to IRA accounts goes toward determining your eligibility for federal retirement tax credits, including the Retirement Savings Contribution Credit. According to Bankrate.com, only $2,000 of your total IRA contributions for all accounts count toward government tax credits.