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

One key difference between a traditional IRA and a Roth IRA is found in the treatment of withdrawals. With a traditional IRA, contributions are typically made with pre-tax dollars, allowing individuals to deduct those contributions from their taxable income in the year they make them. However, when it comes to withdrawals during retirement, those amounts are taxed as ordinary income.

In contrast, contributions to a Roth IRA are made with after-tax dollars, meaning you do not receive a tax deduction when you contribute. The significant advantage of the Roth IRA is that qualified withdrawals, including both contributions and earnings, are tax-free in retirement. This means that if certain conditions are met—such as being at least 59½ years old and having the account for at least five years—individuals can withdraw money without paying any taxes on it.

Thus, the distinction lies in how each account treats withdrawals: traditional IRA withdrawals are taxable, while Roth IRA withdrawals can be tax-free, providing potential long-term tax benefits for those who choose a Roth IRA.