How is a Roth IRA different from a traditional IRA?

A Roth IRA is distinct from a traditional IRA primarily in the way contributions are handled in relation to taxes. With a Roth IRA, contributions are made using after-tax dollars, meaning individuals pay income tax on the money before it is deposited into the Roth IRA. This structure allows for tax-free growth and tax-free withdrawals in retirement, provided certain conditions are met.

Other options do not accurately reflect the key differences:

• For traditional IRAs, contributions often can be deducted on one's income tax return, allowing individuals to subtract contributions from their taxable income in the year they are made. This is not the case with Roth IRAs.

• Distributions from a traditional IRA are generally taxable as income when withdrawn in retirement, whereas qualified withdrawals from a Roth IRA are not taxed, highlighting another significant difference.

• Both Roth IRAs and traditional IRAs have similar contribution limits as set by the IRS, and neither inherently allows for higher contribution limits.

This foundational understanding of tax treatment is crucial for making informed decisions about retirement savings strategies.