How is a traditional IRA different from a Roth IRA?

A traditional IRA allows for tax-deductible contributions, which means that individuals can deduct the amount of their contributions from their taxable income for the year in which they contribute. This has the effect of reducing the individual's tax liability for that year, making it a popular choice for those seeking to lower their taxes in the present. When funds are withdrawn from a traditional IRA in retirement, they are then taxed as ordinary income.

In contrast, contributions made to a Roth IRA are not tax-deductible, which means you pay taxes on your income before you contribute. However, the significant advantage of a Roth IRA is that withdrawals during retirement are generally tax-free, provided certain conditions are met.

The other choices present concepts about minimal withdrawals or investment restrictions that do not clearly differentiate between the two IRA types correctly. Traditional IRAs have required minimum distributions beginning at age 72, and Roth IRAs do not have such requirements during the owner's lifetime, allowing for more flexibility in retirement planning. Overall, understanding the tax implications of contributions and withdrawals is crucial in distinguishing between a traditional IRA and a Roth IRA.