If you don't have a 401(k) or you’ve already contributed the maximum allowed, set up an IRA instead.

You have two choices, a traditional IRA or a Roth IRA. For the 2003 tax year (and 2004 as well), you can invest up to $3,000 a year in a traditional IRA ($3,500 if you are over 50 years old). Your contribution is fully tax-deductible if you are single and have an adjusted gross income below $44,000 ($64,000 if you're married and filing jointly). A $3,000 investment in an IRA will reduce your taxable income by $3,000. The money will grow tax-free until you start making withdrawals (59 is the earliest you can pull out money without incurring a 10 percent penalty). At the point you withdraw money, you owe income tax on the amount of your gains.

A Roth IRA works a little differently. You can invest up to $3,000 in a Roth account if you are a single tax filer with income below $110,000 ($160,000 for married couples filing jointly). There's no tax break when you make the investment, but when you pull out the money there is no tax on the contribution or the interest. Sue Stevens, director of financial planning at Morningstar, a respected fund and investment research firm for individual investors, says this great tax advantage makes Roth IRAs a terrific option.

Where should you put your IRA money? Stevens suggests investing in either a balanced fund that holds both stocks and bonds or an asset-allocation fund that is designed to match your risk tolerance. For example, a 20-year-old should have a more aggressive asset allocation fund than a 55-year-old nearing retirement. In balanced funds, Stevens likes the low-cost and strong performing Oakmark Equity Income fund (www.oakmark.com) and Dodge & Cox Balanced fund (www.dodgeandcox.com). She also recommends looking into Vanguard's Life Strategy asset allocation funds (www.vanguard.com).