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The main difference between Roth and Traditional IRAs lies in when you pay taxes on your contributions and withdrawals.
Contributions: When you contribute to a Traditional IRA, you may be eligible for a tax deduction in the year of contribution, depending on your income and participation in an employer- sponsored retirement plan.
Taxes: The money you contribute to a Traditional IRA grows tax-deferred, meaning you don't pay taxes on the investment gains or income until you withdraw the money in retirement.
Withdrawals: When you withdraw money from a Traditional IRA during retirement, it is considered taxable income, and you will owe income taxes on the amount you withdraw. Additionally, if you withdraw money before the age of 59½, you may have to pay early withdrawal penalties.
Contributions: Contributions to a Roth IRA are made with after-tax money, meaning you don't get a tax deduction in the year of contribution.
Taxes: The contributions you make to a Roth IRA grow tax-free, and you won't owe taxes on the investment gains or income when you withdraw the money in retirement.
Withdrawals: In retirement, qualified withdrawals from a Roth IRA are tax-free. To be considered qualified, you generally need to be at least 59½ years old and have had the account for at least five years.
In summary, the key distinction is that Traditional IRA contributions are typically tax-deductible, and you pay taxes when you withdraw the money in retirement, while Roth IRA contributions are made with after-tax money, and qualified withdrawals in retirement are tax-free. The choice between the two depends on your current tax situation and future tax expectations.