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Traditional IRAs and 401(k)s allow individuals to contribute pre-tax dollars, meaning contributions are tax-deferred and taxed upon withdrawal during retirement. Conversely, Roth IRAs are funded with after-tax dollars, so contributions are made with money that has already been taxed. The key benefit lies in how and when taxes are paid: traditional plans defer taxes, while Roth accounts eliminate taxes on distributions.
One of the standout features of Roth IRAs is their tax-free withdrawals after age 59½, provided the account has been open for at least five years. This contrasts with traditional IRAs, where all distributions, including contributions and investment gains, are taxed as ordinary income.