Which statement about the two main types of IRAs mentioned is true?

Which statement about the two main types of IRAs mentioned is true?

• A. Traditional IRAs and Roth IRAs have distinct qualifications and withdrawal rules.
• B. There is only one type of IRA with no tax differences.
• C. IRAs are always taxable on contributions and withdrawals.
• D. IRAs must be funded with stock investments only.

Answer: (A)

Understanding how traditional and Roth IRAs differ in tax treatment and withdrawal rules helps you compare options. Traditional IRAs often allow a tax deduction for contributions if you qualify, and the account grows tax-deferred until you withdraw. Withdrawals are taxed as ordinary income, and early withdrawals usually incur a penalty, with required minimum distributions starting at around age 72. Roth IRAs are funded with after-tax money, so qualified withdrawals are tax-free, and there are no up-front deductions or lifetime required minimum distributions in most cases. They also have different eligibility and contribution rules. Because of these differences, the statement that traditional IRAs and Roth IRAs have distinct qualifications and withdrawal rules is true.

Understanding how traditional and Roth IRAs differ in tax treatment and withdrawal rules helps you compare options. Traditional IRAs often allow a tax deduction for contributions if you qualify, and the account grows tax-deferred until you withdraw. Withdrawals are taxed as ordinary income, and early withdrawals usually incur a penalty, with required minimum distributions starting at around age 72. Roth IRAs are funded with after-tax money, so qualified withdrawals are tax-free, and there are no up-front deductions or lifetime required minimum distributions in most cases. They also have different eligibility and contribution rules. Because of these differences, the statement that traditional IRAs and Roth IRAs have distinct qualifications and withdrawal rules is true.