What is a key difference between a Roth IRA and a traditional IRA?

A key difference between a Roth IRA and a traditional IRA lies in how and when the contributions and withdrawals are taxed. In a Roth IRA, contributions are made with after-tax dollars, meaning that you pay taxes on the money before you add it to the account. As a result, withdrawals during retirement, including any investment gains, are completely tax-free, provided certain conditions are met (such as reaching age 59½ and having the account open for at least five years). This feature makes the Roth IRA an attractive choice for many investors looking to maximize their tax efficiency in retirement.

In contrast, traditional IRAs generally allow contributions to be made with pre-tax dollars, which can provide an immediate tax deduction. However, taxes are due upon withdrawal during retirement, meaning that the funds will be taxed as ordinary income when taken out. Thus, the tax treatment of withdrawals is a significant differentiator between these two retirement accounts, emphasizing the advantages of tax-free growth and withdrawals in a Roth IRA.

The other options misunderstand how the two accounts operate. For example, both types of IRAs have certain tax benefits, and while traditional IRAs often offer deductible contributions, Roth IRAs do not, as they are funded with after-tax money. Additionally, both account types