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

The primary difference between a traditional IRA and a Roth IRA centers on how taxes are managed concerning contributions and withdrawals. Traditional IRAs allow individuals to make contributions that may be tax-deductible in the year they are made. Consequently, the money in a traditional IRA grows tax-deferred until it is withdrawn, typically during retirement when the account owner may be in a lower tax bracket. This feature makes traditional IRAs particularly appealing for those seeking immediate tax relief.

On the other hand, contributions to a Roth IRA are made with after-tax dollars, which means there are no upfront tax deductions. However, the benefit of a Roth IRA lies in the tax-free withdrawals of both contributions and earnings during retirement, provided certain conditions are met. This can be advantageous if you anticipate being in a higher tax bracket post-retirement.

Understanding this distinction highlights why traditional IRAs are associated with tax deductions for contributions, emphasizing their role in immediate tax benefits compared to the future tax advantages offered by Roth IRAs.