How to correctly cite a retracted paper?
If you cite the study, then the citation should appear in the list of references. 

The exact way to note the retraction varies based on the citation style (e.g. APA, MLA, etc.), as Nate Eldredge mentions in his comment. However, the basic convention seems to be to note the retraction in parenthesis, as an additional part of the original reference. For example:

Ricaurte, G. A., Yuan, J., Hatzidimitriou, G., Cord, B. J., &amp; McCann, 
     U.D. (2002, September 27). Severe dopaminergic neurotoxicity in 
     primates after a common recreational dose regimen of MDMA. 
     Science, 297, 2260-2263. (Retraction published September 12, 
     2003, Science, 301, p. 1454)

This example comes from http://blog.apastyle.org/apastyle/2013/01/retraction-action.html, which pertains specifically to APA.