Regular IRA

• In a traditional IRA there are some immediate tax savings because contributions into a regular IRA are tax deductible for that year. As of 2010, yearly tax deductions are allowed up to $5,000 as long as you are not covered by a separate retirement plan at work, or as long as your income is below a certain threshold. The tax deductions do get phased out depending on your annual income level, with less deduction available as your income level gets higher.
  
  

Roth IRA

• A Roth IRA is also a popular choice, with the main difference being that with a Roth IRA there are no tax deductions allowed up front. However, this also means that the investment income earned from a Roth IRA is not taxable, meaning that once you hit retirement, you do not have to pay any income taxes on the savings that you have acquired through the account.
  
  

The Difference

• A traditional IRA can be seen as a "tax deferred" status. The tax deduction that you can take on a year to year basis because of contributions made is immediately beneficial, but after retirement you will be hit with income taxes. On the other hand, with a Roth IRA since all the taxes are paid up front, there are no income taxes due at all since you have already paid all the taxes on income invested.
  
  

Which Is Better?

• Many individuals prefer the Roth IRA, since the number in the account matches what they have at retirement without any questions about income taxes. That being said, the traditional IRA does offer immediate tax relief which might make a big difference if that is enough to encourage heavier retirement investment than might otherwise occur.
  
  

Tax Deduction Phase Outs

• If you have a traditional IRA instead of a Roth, you only get tax deductions up to a certain income level, then the tax deductions are slowly phased out. Some people may make enough to not qualify for tax deductions at all, which makes being up to date on the year to year tax law changes very important.