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

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

• A. Both are taxed at retirement
• B. Traditional IRAs are funded with after-tax dollars
• C. Withdrawals from traditional IRAs are tax-free
• D. Contributions to traditional IRAs may be tax-deductible

Answer: (D)

The choice regarding contributions to traditional IRAs potentially being tax-deductible is accurate. Traditional IRAs allow individuals to contribute pre-tax income, which can help reduce their taxable income for the year they make the contribution. This means that the amounts contributed to a traditional IRA can often be deducted from your taxable income when you file your tax return, thus providing an immediate tax advantage. Upon retirement, withdrawals from a traditional IRA are taxed as ordinary income, unlike the contributions to a Roth IRA, which are made with after-tax dollars. This key distinction emphasizes the immediate benefits of tax-deductible contributions to a traditional IRA. Additionally, while withdrawals from traditional IRAs are subject to tax, qualified withdrawals from Roth IRAs are tax-free in retirement, further distinguishing the two types of accounts. Therefore, the correct answer highlights an essential aspect of traditional IRAs related to tax deductions, which is a significant advantage for many savers planning for retirement.

The choice regarding contributions to traditional IRAs potentially being tax-deductible is accurate. Traditional IRAs allow individuals to contribute pre-tax income, which can help reduce their taxable income for the year they make the contribution. This means that the amounts contributed to a traditional IRA can often be deducted from your taxable income when you file your tax return, thus providing an immediate tax advantage.

Upon retirement, withdrawals from a traditional IRA are taxed as ordinary income, unlike the contributions to a Roth IRA, which are made with after-tax dollars. This key distinction emphasizes the immediate benefits of tax-deductible contributions to a traditional IRA. Additionally, while withdrawals from traditional IRAs are subject to tax, qualified withdrawals from Roth IRAs are tax-free in retirement, further distinguishing the two types of accounts.

Therefore, the correct answer highlights an essential aspect of traditional IRAs related to tax deductions, which is a significant advantage for many savers planning for retirement.