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

The correct answer highlights that a traditional IRA allows for pre-tax contributions, meaning that individuals can contribute money to the account before taxes are deducted from their income. This can lower their taxable income for the year in which the contributions are made. When funds are withdrawn from a traditional IRA in retirement, those withdrawals are taxed as ordinary income, reflecting the deferred tax treatment of the contributions made earlier.

This structure of the traditional IRA is beneficial for individuals who anticipate being in a lower tax bracket during retirement than they are in their working years. The idea is to defer tax payments to a later time, providing potential tax savings based on future income levels.

Conversely, the other options inaccurately describe the characteristics of traditional and Roth IRAs. A correct understanding of these distinctions is essential for effective retirement planning.