Final answer:
A Traditional IRA is taxed upon withdrawal, not when money is deposited, and allows for tax-deferred growth. A Roth IRA offers tax-free growth, with no taxes on withdrawals. Both have annual contribution limits and tax implications for retirement planning.
Step-by-step explanation:
A Traditional IRA is an individual retirement account that allows individuals to contribute pretax income towards investments that grow tax-deferred. With this type of account, the money is taxed when withdrawn rather than when it is deposited. Contrarily, a Roth IRA provides tax-free growth, meaning that contributions are taxed before they are deposited, but earnings accumulate tax-free, and withdrawals are also tax-free.
Moreover, these retirement savings vehicles are influenced by annual contribution limits and individual retirement ages, and understanding the differences in taxation is crucial for effective retirement planning. LibreTexts also notes that by deferring taxation, IRAs and similar accounts such as 401(k)s inherently encourage savings by increasing the return on those savings until retirement.