Ace Your Taxes with Intuit Academy 2025 – Level 1 Challenge Awaits!

A defining characteristic of a Roth IRA compared to a traditional IRA is that distributions from a Roth IRA are usually tax-free. This tax benefit arises because contributions to a Roth IRA are made with after-tax dollars, meaning taxes are paid on the income before it is contributed to the account. Consequently, qualified withdrawals—including earnings—can be taken tax-free during retirement.

In contrast, a traditional IRA allows contributions to be made pre-tax or tax-deductible, and taxes are paid upon withdrawal during retirement. This fundamental difference in tax treatment is a key reason why many investors choose a Roth IRA for long-term tax planning, especially if they anticipate being in a higher tax bracket during retirement than they are currently.

The other choices do not correctly characterize the differences between Roth and traditional IRAs: Roth IRAs do not have higher contribution limits than traditional IRAs, they allow early withdrawals (though with some conditions), and they do not require mandatory withdrawals at age 72, unlike traditional IRAs which are subject to Required Minimum Distributions (RMDs).