IRAs are personal retirement plans where you can invest your money into and get a tax break for doing it. Once more you can postpone the taxes on the interest that you make off of your investments while they are in the plan. There are two major types of IRAs.

The first plan is called a traditional IRA. Traditional IRAs work in pretty much the same way that traditional 401ks work. You invest money into the plan and write off the money that you do invest when you do your taxes.

For instance, say you invest $4,000 into a traditional IRA and another $4,000 into a private trading account. The $4,000 you invested into the IRA would work as a tax write off where as the $4,000 you invested into the trading account would not be. Also all things being equal the IRA would grow at a faster rate than the trading account because you do not have to pay taxes on the money as long as it is still invested into the plan. This is because your money is not being slowed down because of taxes. IRAs are simply a better way of investing.

Now it is important to remember that you can’t just cheat your way out of taxes with this method. You will still have to pay taxes once you take the money out. Luckily because you avoided the taxes on the interest and it has compounded so much you still come out way ahead.

One other alternative to a traditional IRA plan would be a Roth IRA. Roth IRAs are a little different then traditional IRAs. Instead of getting a tax break up front and paying taxes when you withdraw the money you pay normal taxes up front but get to withdraw the money (including the interest that you made on the investments) completely tax free just as long as you follow the same basic IRA withdrawal rules.

So, what makes the better investment? This kind of depends on your specific situation. Think about it this way, you are going to pay taxes sooner or later. If you think your tax rate will be higher in the future then you’ll want to go with a Roth IRA and pay taxes while they are lower.

On the other hand if you think that your tax rate now is as high as it ever will be then it would be better to avoid paying taxes until you can pay them when they are lower. This would make a traditional IRA plan the way to go.

For more on IRAs here are some IRA account rules