In a tax-advantaged retirement plan, what is the main difference between traditional and Roth accounts?

• A. Traditional accounts offer upfront tax deductions with tax-deferred growth; Roth accounts use after-tax dollars and offer tax-free withdrawals.
• B. Roth accounts offer upfront tax deductions with tax-deferred growth; traditional accounts use after-tax dollars and offer tax-free withdrawals.
• C. Traditional accounts offer no tax benefits.
• D. Roth accounts are funded with pre-tax dollars.

Answer: (A)

The main idea is when taxes are paid. With traditional retirement accounts, you often get an upfront tax deduction for your contributions, which reduces your current taxable income. The money grows tax-deferred, and you pay taxes on withdrawals in retirement as ordinary income. With Roth accounts, you contribute with after-tax dollars, so there’s no upfront deduction, but the money grows tax-free and qualified withdrawals in retirement are tax-free as well. This difference in tax timing is what sets them apart. Roths can be especially advantageous if you expect to be in a higher tax bracket later, while traditional accounts may be better if you expect to be in a lower bracket in retirement.