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An IRA (Traditional or Roth) is a great way to start saving for retirement. The beauty of the two IRAs is the tax benefits that each program offers.

With the Traditional IRA, your contributions are tax deferred, meaning you can deduct contributions from your earned income for the year. Your deposits also grow tax free until withdrawal. The only downside with a traditional is that withdrawals are taxed at the current rate. This may benefit you if you are in a high tax bracket now and expect to be in a lower bracket upon retirement.

With a Roth IRA your contributions are not tax deductible. Your funds grow tax free, and any earnings withdrawn after a certain age are not subject to income taxes. One advantage to the Roth is that you can withdraw your contributions without penalty. This can be great if you need funds for an emergency and don’t want to have the added burden of additional fees. A drawback is that you cannot deduct your contributions from your taxes.

As you can see, each has its own unique set of advantages and disadvantages. To read the official IRS rules and regulations for each type of account, click here.

One important thing that you should be aware of though is that you are only allowed to contribute a certain amount each year. If you are under 50, the 2007 contribution is $4,000 and the 2008 contribution limit is $5000. If you are 50 or older you can contribute up to $5,000 in 2007 and $6,000 in 2008. I included the 2007 tax values because you can actually make contributions to your IRA for the previous tax year all the way up until taxes are due on April 15th, 2008. By making a 2007 contribution you are giving yourself the opportunity to maximize your total allowable contributions.