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1. Traditional IRA:
– Contributions to a traditional IRA are typically tax-deductible in the year they are made, reducing the contributor’s taxable income for that year.
– The earnings on investments within a traditional IRA grow tax-deferred until withdrawal.
– Withdrawals from a traditional IRA are taxed as ordinary income in retirement, and early withdrawals may incur a penalty.
2. Roth IRA:
– Contributions to a Roth IRA are made with after-tax dollars, so they are not tax-deductible in the year they are made.
– The earnings on investments within a Roth IRA grow tax-free, and qualified withdrawals are not subject to taxation.
– Unlike a traditional IRA, contributions to a Roth IRA can be withdrawn penalty-free at any time, but earnings withdrawals may be subject to penalties if made before age 59½ and certain conditions are not met.
Contributions to a traditional IRA may be tax-deductible, but withdrawals are taxed as ordinary income. Contributions to a Roth IRA are not tax-deductible, but qualified withdrawals are tax-free.