When it comes to planning for a long-term goal like retirement, utilizing a tax-advantaged investment makes a big difference. Virtually everyone stands to benefit from avoiding or deferring taxes on retirement investments. Over the long term, as the chart below shows, tax-advantaged investments may grow much more quickly than taxable investments, because they lose much less to taxes and investors can thus reinvest greater amounts.

The Power of Tax-advantaged Investing *

Assumes an 8% rate of return before taxes, annual investments of $5,000 for each of 30 years tax rate of 25% during investing years (on taxable savings only) and a qualified distribution from the Roth IRA at the end of 30 years.

If you invest only a small amount each year, the additional benefit of a tax-favored investment vehicle can be significant.

The tax advantages of a traditional IRA start immediately. In some instances, the annual contribution can be deducted from your current income, lowering your overall tax bill. Any earnings and appreciation of the investments in your IRA will then grow and compound every year on a tax-deferred basis. Generally, no taxes will be due until you begin withdrawals in retirement, when your tax bracket will typically be lower.

With a Roth IRA, the contributions you make are from your after-tax dollars. As with the traditional IRA, your money grows tax-deferred. Provided you only receive qualified distributions, you will pay no income tax on any portion of your withdrawals in retirement.

Click here to for a guide to your 2012 taxes

* This chart is for illustrative purposes only and is not representative of the performance for any particular investment fund. This chart is for a selected time period and does not assume taxes or possible penalties that would be applicable upon withdrawal. The value of an actual investment and rate of return will vary.

Source: Bankrate.com