[NSchandler]

Because by delaying paying taxes on your contributions and your interest, you can accumulate interest on money that you otherwise would have paid in taxes.

Suppose your marginal rate is 30%. You have $1000 pre-tax. You invest your money at 10% per year. You can invest $700 today ($1000*(1-t)), and it will turn into about $5,329 after 30 years, assuming you pay taxes annually on the interest accrued.

Now suppose you have the same $1000 pre-tax, but invest it in an IRA, where both your contributions and the interest you earn are tax-deferred. The $1000 turns into $17,449, but you'll have to pay 30% taxes on the entire sum at this point, leaving you with $12,215.

The benefits will be even greater if your current marginal tax rate is higher than the marginal rate you expect to pay when you're retired (a reasonable assumption, since your retirement income will most likely be lower than your current income).

I would actually recommend a Roth IRA over a traditional IRA because you can effectively contribute more per year, since contributions are after-tax rather than pre-tax. Roth IRAs work slightly differently, but it's the same basic logic. With Roth IRAs, you pay taxes on your contributions now, but interest accrues tax-exempt, rather than tax-deferred. Mathematically, as long as your current marginal tax rate is equal to the marginal tax rate you expect to pay when you withdraw the money, there is no difference between contributing $1000 pre-tax or $700 after-tax - they will both accrue to the same $12,215 after taxes. But, you can only contribute $4000 per year (it's increasing every year) to your IRA accounts. Contributing to a Roth IRA effectively allows you more contributions since you're contributing after-tax rather than pre-tax income.

There are also SEP-IRAs, that allow you to save up to 25% of your income, $42,000 max per year. I'd talk to a professional about all of this, but this is the jist of it.

Hope this helps.