For tax year 2012, contributions up to $5,000 ($6,000 if age 50 or older) to a traditional IRA may be deductible. This money grows tax free until withdrawn, and then the deductible contributions and earnings are taxed. If the money is withdrawn early, it becomes taxable as income, and may also be subject to 10% additional tax.
Contributions up to $5,000 ($6,000 if age 50 or older) to a Roth IRA are not tax deductible. This money grows tax free and qualified distributions can be withdrawn tax free. If the money is withdrawn early, the interest earned becomes taxable as income and may be subject to 10% additional tax.
If money is withdrawn from an IRA prior to age 59 ½, an additional 10% tax is assessed unless certain exceptions are met (e.g., buying a home for a first-time home buyer, or withdrawing to pay for qualified education or medical expenses).