When You Make the Contribution

• If you contribute to a traditional IRA, you are allowed to take an above-the-line deduction equal to your contribution. An above-the-line deduction is one that can be taken in addition to the standard deduction. You will not pay income taxes on the money in the year you make the contribution. If you are single and your taxable income is $105,000 in 2009, you are in the 28 percent tax bracket. If you contribute $5,000 to your traditional IRA, your taxable income decreases by $5,000, reducing your tax debt by $1,400. There is no deduction for contributions for a Roth IRA.
  
  

When the Money is in the Account

• While the money is in your Roth IRA or traditional IRA, the money grows tax-free, and the full amount of your investment earnings are compounded. For example, if you have $10,000 in your IRA and earn a 10 percent return, you avoid paying tax on that income, so the full $1,000 is added to the account and compounds each year thereafter.
  
  

At Retirement

• When you reach age 59 1/2, you are allowed to start withdrawing money from your IRA. If you put your money in a Roth IRA, you are able to withdraw the money from your IRA without having to report it as income. So you don't pay tax on the distribution. You do pay taxes, however, on withdrawals from a traditional IRA. The money is taxed as income when you withdraw it, but you pay less tax on the money than you would have in the year you contributed if you are in a lower tax bracket when you withdraw it.