The government wants you to save for retirement. When the government wants you to do something they encourage you by giving you a tax break to do what they want. When it comes to retirement they do this by allowing you to skip or defer paying taxes on money that you put into special retirement accounts.

Basically this means if you are paying 25% in taxes, $1000 earned would only be $750 by the time you pay taxes on it and put it in a regular account. If you put it in a special retirement account you can put the entire $1,000 into savings.

There are several types of retirement accounts. Most large employers offer 401k accounts. Usually they allow you to deduct money from your paycheck and put directly into the retirement account. The money is deducted before the taxes are calculated on your paycheck so it goes into savings tax free. If you take the money out of the 401k account before you retire, you have to pay taxes and an additional fee (something like 10%). You can usually put up to 20% of your income into a 401k.

IRAs are another type of retirement account that you can do as an individual without your employer. You can contribute $2,000 to $3,000 per year into an IRA. At the end of the year that money is deducted from your income for the purposes of calculating your taxes.

A Roth IRA is similar to a regular IRA, but you have to pay tax on the money before you put it in. However, with a Roth, you dont have to pay taxes when you take it out. If you are young and wont be retiring for awhile, a Roth may be a good choice for you. If it has time to grow to many times the original investment, you may be able to pay taxes on a small amount and withdraw a much larger amount tax free in the future.

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