Traditional vs. Roth IRAs
Individual retirement accounts with opposite tax timing: traditional IRA contributions may be tax-deductible and withdrawals are taxed as ordinary income with required minimum distributions; Roth contributions are after-tax and qualified withdrawals — including all growth — are tax-free, with no lifetime RMDs.
The exam loves the catch that disqualifies a deduction or a contribution. A traditional-IRA deduction phases out only when the saver (or spouse) is an active participant in an employer plan and income is too high — without a workplace plan, anyone with earned income deducts in full at any income. Roth eligibility, by contrast, phases out by income itself (MAGI), so a high earner can be barred from contributing directly. Two more “tells”: contributions run up to the tax-filing deadline (typically April 15) for the prior year, and excess contributions draw a 6% excise tax each year until corrected.
Don’t confuse the tax angle with the cash-only mechanics of the sibling terms: like custodial accounts, an IRA must be a cash account — no margin, no naked options (a tax-code prohibited-transaction rule, not just firm policy). The classic trap is Roth RMDs — the owner has none for life, but non-spouse beneficiaries must still empty the account, generally within 10 years. Memory hook: Roth = pay tax now, withdraw growth tax-free.
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