Which statement accurately defines a traditional IRA?

A traditional IRA, or Individual Retirement Account, is defined primarily by its tax treatment at the time of contribution and withdrawal. The correct response outlines that contributions to a traditional IRA can be made using pre-tax income, which means that individuals can deduct these contributions from their taxable income for the year they make them. This deferral of taxes allows the account to grow tax-free until the individual decides to withdraw funds, usually in retirement. At that point, withdrawals are taxed as regular income.

This structure is advantageous for many savers, as it can lower their taxable income when contributing, potentially placing them in a lower tax bracket and providing the benefit of compound interest without immediate taxation on investment gains. The tax owed is deferred until withdrawal, aligning well with a long-term savings strategy for retirement.

Other choices do not accurately describe the characteristics of a traditional IRA. Contributions being made with after-tax income, for instance, relates more closely to a Roth IRA. The notion that a traditional IRA has no tax advantages fails to recognize the key benefit of tax deferral. Finally, while traditional IRAs do require minimum distributions after a certain age, that detail alone does not define the account; it is specifically the tax treatment of contributions and withdrawals that is fundamental to its identity.