What is an IRA and why do I need one?
An Individual Retirement Account (IRA) is a retirement savings plan that allows you to contribute up to $4,000 a year (in 2007). An IRA is an account in which you can have various different investments. You can put your IRA funds in stocks, mutual funds, CDs, money markets or other investments. The long-term benefit is that you will pay less taxes. We all like paying less taxes, and what this means for your retirement is that you will have more money in your hand when you retire.
With a traditional IRA, your money is put into the account before you pay taxes on them. The downside to this when you retire and begin taking the money out of your IRA you will have to pay taxes on it then. One benefit of paying taxes later, is that it will lower your taxable income for the current year. The alternative to this, which is a great choice for most people, is a Roth IRA.
The main difference between the Roth IRA and the Traditional IRA is when you pay taxes on the funds invested. The main benefit of the Roth IRA is that you use after-tax money to fund it, so when you reach retirement age you will not pay ANY taxes on the withdrawals. That just makes me smile thinking about it.
For more info check out What is an IRA account?