Final answer:
A Traditional IRA and 401(k) are taxed upon withdrawal, as they are tax-deferred, whereas the growth in a Roth IRA is tax-free, including no taxes on distributions. Defined contribution plans like 401(k)s and 403(b)s are also tax-deferred and popular due to their flexibility and portability.
Step-by-step explanation:
Tax-free retirement accounts are distinct mechanisms designed to encourage long-term savings by offering favorable tax treatment. For example, a Traditional IRA and 401(k) plans are tax-deferred accounts, meaning contributions you make reduce your taxable income for the year you make them, and the money grows tax-free until you withdraw it, typically in retirement. Upon withdrawal, the distributions are taxed as ordinary income. Conversely, a Roth IRA has tax-free growth, meaning you pay taxes on the money you contribute but no taxes on earnings or upon withdrawal, assuming certain conditions are met, such as being age 59½ or older and having had the account for at least five years.
The main difference between these retirement accounts lies in the timing of the tax advantage. With traditional tax-deferred accounts like a 401(k) or Traditional IRA, you get the tax break upfront, potentially reducing your current taxable income every year you contribute. With a Roth IRA, you get the tax break later since you contribute after-tax dollars, but you benefit from tax-free withdrawals during retirement. Both approaches offer advantages, but they depend on your current tax bracket, expected future tax bracket, and investment goals.
Defined contribution plans like the 401(k)s and 403(b)s are similar to Traditional IRAs in that they're tax-deferred, and the employer often contributes alongside the employee. These types of plans have grown in popularity over defined benefit plans (traditional pensions) and offer the flexibility of being portable.