How does a Traditional IRA differ from a Roth IRA in terms of taxation?

The distinction between a Traditional IRA and a Roth IRA in terms of taxation is centered on how contributions and distributions are taxed. With a Traditional IRA, contributions may be tax-deductible in the year they are made, meaning you can lower your taxable income by the amount you contribute, thus delaying the tax payment until you withdraw the funds during retirement. This feature provides an immediate tax benefit, allowing individuals to reduce their taxable income in their working years.

On the other hand, contributions to a Roth IRA are made with after-tax dollars, which means you pay taxes on the money before you contribute. However, the primary advantage of a Roth IRA is that qualified withdrawals in retirement are tax-free, provided certain conditions are met. This allows for tax-free growth and distribution of funds, making it especially beneficial for those who expect to be in a higher tax bracket in retirement.

The statement emphasizes that while Traditional IRA contributions may be tax-deductible, Roth IRA contributions are not, which reflects the fundamental difference in how each account handles taxation both at the time of contribution and withdrawal.