These funds are typically withheld from your paycheck.

By the way, if your company offers a 401(k), that means you can fund both the 401(k) and your own personal IRA every year.

The contribution limits of an IRA and 401(k) apply here as an aggregate limit; in other words, contributions apply to your total investment in an IRA and an Roth IRA, and your total investment in a 401(k) and a Roth 401(k).

Hint: Yes.

Here are a couple of pros and cons of funding a retirement account with pre-tax dollars you want to make sure you understand:

PRO: Since these are pre-tax or tax-deferred dollars, you get a tax break now since your income for the year is reduced by the pre-tax amount you put into your IRA.

CON: You’re going to pay taxes sometime, that’s why it’s called “tax-deferred.” And if you do it right, you’re going to pay A LOT more taxes, because in theory you are going to invest and grow the money in your IRA over time so you have two or three or ten or even a hundred times more money than you put in, and you will pay taxes on all your original contributions and all your growth each time you make a withdrawal. On the other hand, once you retire your tax rate is probably going to be a lot lower than when you were working.

You pay taxes on money and then put it in your Roth every year. Now let it sit there for ten or twenty or thirty years while you also invest it to make it grow.

Let’s say over all those years, you put in $100,000 and it has grown to a million.

Now at 59 1/2 or older, you can take out as much money as you want, whenever you want, and never pay more taxes. You already paid taxes on the $100,000 but you’ll never pay taxes on the other $900,000.

If you want to know more about this, see our story on one of the founders of PayPal who put $2,000 after-tax dollars into a Roth and grew it to $5 billion dollars tax-free.

But hey, it’s still free money!

In some cases, deducting the amount of your IRA /andor 401(k) contributions will push you into a lower income tax bracket, in which case your tax savings will be even greater because you will not only benefit from the lower gross income for the year but also the income tax rate itself will be lower.

Think about this for a minute:

If you put $100,000 into a Roth over the course of your career, you would pay taxes on the $100,000. But you will pay no taxes on the money you earn while investing that $100,000. So if you turn the $100,000 into a million, you will have already paid taxes on the $100,000 you put into the Roth, and you will never pay any taxes on the other $900,000 as long as you don’t take any withdrawals before you turn 59 1/2.