What distinguishes a traditional IRA from a Roth IRA?

The distinction between a traditional IRA and a Roth IRA primarily revolves around the tax treatment of contributions and withdrawals. A traditional IRA allows for tax-deferred contributions, meaning that the money you put in is deducted from your taxable income for the year, allowing you to potentially lower your tax bill at the time of contribution. The funds in a traditional IRA grow tax-free until you start making withdrawals, which are generally taxed as ordinary income.

On the other hand, Roth IRAs operate differently. Contributions to a Roth IRA are made with after-tax dollars, meaning you pay taxes on the money before you put it into the IRA. However, when you withdraw money from a Roth IRA during retirement, the funds, including any investment gains, are tax-free, provided certain conditions are met.

This understanding of tax implications, specifically the ability to defer taxes on contributions with a traditional IRA and the benefit of tax-free withdrawals in a Roth IRA, highlights the core difference that makes the correct answer distinct and accurate.