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

The distinction between a traditional IRA and a Roth IRA is primarily rooted in the tax treatment of contributions and withdrawals. When you contribute to a traditional IRA, those contributions can be tax-deductible, meaning you can lower your taxable income for the year you make the contribution. In essence, you are saving on taxes upfront, as you will pay taxes on the withdrawals taken during retirement.

On the other hand, contributions to a Roth IRA are made with after-tax income, meaning you've already paid income tax on those funds prior to contributing. This allows for tax-free withdrawals in retirement, provided certain conditions are met. The allure of a Roth IRA lies in the fact that, when you retire, you can take out your contributions and earnings without incurring further tax liability, which can be quite beneficial.

Understanding these differences is crucial for making informed decisions about retirement savings and tax strategy.