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

A traditional Individual Retirement Account (IRA) and a Roth IRA are both effective retirement savings vehicles, but they differ in several key ways, particularly concerning tax treatment, eligibility, and withdrawal rules. With a traditional IRA, contributions are typically made with pre-tax dollars, meaning individuals may be able to deduct contributions from their taxable income in the year they are made. This can reduce the current tax burden. However, taxes are due upon withdrawal during retirement, so the funds grow tax-deferred until they are distributed. In contrast, contributions to a Roth IRA are made with after-tax dollars, meaning there is no tax deduction in the year contributions are made. The significant advantage of a Roth IRA is that qualified withdrawals in retirement are tax-free. This can be particularly beneficial for those who anticipate being in a higher tax bracket during retirement. There are income limits that may affect eligibility to contribute to a Roth IRA, whereas traditional IRAs generally have no income limits for contributions but may be subject to limits regarding tax deductibility based on income and retirement plan coverage. Additionally, traditional IRAs require minimum distributions starting at age seventy-two, while Roth IRAs do not have required minimum distributions during the account holder's lifetime, allowing for more flexibility with retirement withdrawals. Individuals should consider their current and future tax situations when deciding between these two types of accounts. For more detailed information, it may be helpful to consult the educational materials available on the Prudential website.