How does a Roth IRA differ from a traditional IRA?

The key distinction between a Roth IRA and a traditional IRA lies in the tax treatment of contributions and withdrawals. In a Roth IRA, contributions are made using after-tax dollars, meaning individuals pay taxes on the money before it is contributed to the account. This contrasts with a traditional IRA, where contributions may often be made with pre-tax dollars, allowing for an immediate tax deduction when contributions are made.

The significant advantage of a Roth IRA comes at retirement when withdrawals are made. Since the contributions were taxed upfront, qualified withdrawals—including both contributions and any earnings—are tax-free in retirement. This can provide substantial tax savings for the account holder, especially if they expect to be in a higher tax bracket in retirement.

This understanding of tax implications is crucial for effective retirement planning, enabling individuals to strategize their savings based on their expected income levels during their retirement years. The other answer choices introduce limitations either related to the type of contributions or the age of the account holder, which, while factual, do not capture the central tax distinction that makes the Roth IRA particularly appealing.