When you save in a regular savings account, interest you earn is taxable annually as ordinary income. Year after year, this taxation can take a huge bite out of your potential earnings. In a retirement savings plan or IRA, your earnings grow tax-deferred until you withdraw the money (at which point it is taxed as ordinary income). Keep in mind there may be a ten percent Federal penalty for withdrawal prior to age 59 1/2. Tax-deferred compounding means your account balance grows much faster because all of your earnings are reinvested without being reduced by current taxes.