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

The key difference between a Roth IRA and a Traditional IRA lies in the tax treatment of contributions. With a Traditional IRA, contributions are often tax-deductible in the year you make them, meaning you can lower your taxable income for that year. However, you will pay taxes on withdrawals during retirement.

In contrast, contributions to a Roth IRA are made with after-tax dollars; this means you do not get a tax deduction in the year you contribute. The significant advantage comes later: qualified withdrawals in retirement are tax-free. This fundamental difference in how contributions are taxed shapes many people's choices between the two account types based on their current and expected future tax situations.

Other elements such as withdrawal penalties or investment options may vary, but they do not capture the fundamental distinction regarding taxation that affects how individuals should plan for their retirement savings. Similarly, age limits for contributions are not distinguishing factors since both IRAs have specific rules around contribution ages but differ mainly in tax treatment.