Which statement correctly describes the tax treatment of a Traditional IRA?

• A. Contributions may be tax-deductible; withdrawals are taxed as income.
• B. Contributions are never tax-deductible; withdrawals are tax-free.
• C. Contributions are taxed when made; withdrawals are tax-free.
• D. Contributions are tax-free; withdrawals are taxed at capital gains rates.

Answer: (A)

Traditional IRA contributions can reduce your current taxable income because they may be tax-deductible, though eligibility depends on your income and whether you’re covered by a workplace retirement plan. When you withdraw money in retirement, those funds are taxed as ordinary income at your current tax rate. That combination—possible deduction when you contribute and ordinary-income taxation on withdrawals—is the core idea behind how Traditional IRAs work.

Contributions aren’t always deductible; some people, based on income and employer plan coverage, don’t get a deduction. Withdrawals aren’t tax-free, and they aren’t taxed at capital gains rates—the distributions are taxed as ordinary income (with a portion potentially tax-free only if you had non-deductible contributions and keep track of the basis).