Because it determines whether the tax rate you pay on your Roth IRA contributions is higher or lower than what you’d pay on your traditional IRA’s withdrawals in retirement.
Ultimate guide to retirement. Your withdrawals from a Roth IRA are tax free as long as you are 59 ½ or older and your account is at least five years old. Withdrawals from traditional IRAs are taxed as regular income, based on your tax bracket for the year in which you make the withdrawal.  Traditional IRA contributions are tax deductible on both state and federal tax returns for the year you make the contribution, while withdrawals in retirement are taxed at ordinary income tax rates. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free. That’s because it determines whether the tax rate you pay on your Roth IRA contributions (today’s tax rate) is higher or lower than what you’d pay on your traditional IRA’s withdrawals in retirement. Of course, it’s hard to predict what federal and state tax rates will be 10, 20 or even 40 years from now. Roth IRA contributions are not taxed at the time you contribute the funds to your Roth IRA. However, your contributions come from post-tax income. You pay taxes on your income today, but not in the future. You paid tax on that income when you first contributed to the Roth IRA. If the withdrawal is made before age 59 and 1/2 and is only up to the amount that has been contributed to the Roth IRA then no income tax is charged. Withdrawals of contributions are tax-free. Roth IRA withdrawals are completely tax-free when taken at retirement, representing a significant benefit to the account owner. This is an advantage over a traditional IRA or over investing outside an IRA and paying capital gains taxes on the growth of your investments. For example, you made a tax-deductible contribution of $10,000 to your traditional IRA, and over many years the value of the account grew to $50,000. Later, you withdraw the entire balance, and you owe taxes on the total withdrawal as if it were normal income, at your income tax rate. If you own a Roth IRA, you may be under the impression that withdrawals are always income-tax-free. Not true. Even worse, some withdrawals can be socked with a 10% penalty on top of the income tax bill. Here’s what you need to know if you took some Roth withdrawals last year. (For a list of the exceptions, see How to make penalty-free IRA withdrawals .) If you owe the penalty tax, fill out IRS Form 5329 (Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Plans) and enter the penalty on line 58 of Form 1040. Penalties on Earnings from Contributions. Unless an exception applies, most distributions from a Roth IRA before the owner reaches age 59 1/2 will be subject to an early withdrawal penalty of 10% on the amount of the distribution.  You should not mix Roth IRA funds with the other types of IRAs. If you do, the Roth IRA funds will become taxable. Regular Income Tax Only: Voluntary On-Time Withdrawal/Traditional IRAs and Other Non-Roth IRAs. Once you reach age 59½, you can withdraw money without a 10% penalty from any type of IRA. If it's a Roth IRA, you won't owe any income tax. If it's not you will. If the money is deposited in a traditional IRA, SEP IRA, Simple IRA or SARSEP IRA you will owe taxes at your current tax rate on the amount you take out. For example, if you are in the 15% tax bracket, your withdrawal will be taxed at 15%.  While you pay no tax on contributions that you make to a traditional IRA, all withdrawals are taxable at your regular income tax rates. For example, you made a tax-deductible contribution of $10,000 to your traditional IRA, and over many years the value of the account grew to $50,000. Later, you withdraw the entire balance, and you owe taxes on the total withdrawal as if it were normal income, at your income tax rate. Withdrawals made after age 59 and 1/2 are normal retirement withdrawals and are not taxed. You paid tax on that income when you first contributed to the Roth IRA. If the withdrawal is made before age 59 and 1/2 and is only up to the amount that has been contributed to the Roth IRA then no income tax is charged. Withdrawals of contributions are tax-free. A traditional IRA is a way to save for retirement that gives you tax advantages. 1  Contributions you make to a traditional IRA may be fully or partially deductible, depending on your circumstances, and. 2  Generally, amounts in your traditional IRA (including earnings and gains) are not taxed until distributed. 
http://money.cnn.com/retirement/guide/IRA_Basics.moneymag/index11.htm http://www.rothira.com/traditional-ira-vs-roth-ira http://www.rothira.com/roth-ira-taxes-and-tax-issues http://finance.zacks.com/ira-withdrawal-ordinary-income-capital-gain-7292.html http://www.marketwatch.com/story/taxes-on-roth-ira-withdrawals-2014-02-25 http://www.fool.com/money/allaboutiras/allaboutiras07.htm http://www.investopedia.com/articles/personal-finance/021015/how-much-are-taxes-ira-withdrawal.asp http://finance.zacks.com/ira-withdrawal-ordinary-income-capital-gain-7292.html http://www.rothira.com/roth-ira-taxes-and-tax-issues https://www.irs.gov/retirement-plans/traditional-iras
why is traditional ira withdrawal taxable