The quality of an item in the world of Terraria is determined by the color of its name. There are currently eight tiers of item quality.
Tier -1: Gray (Poor)
Tier 0: White (Common)
Most items in the game that are craftable will end up being Tier 0. This Copper Helmet is an example of a Tier 0 (White). With the exceptions of Obsidian, Fireblossom and Fireblossom Seeds, items of this tier are destroyed when in lava that is deep enough to cover approximately 25% of the item.
Tier 1: Blue (Good)
Tier 2: Green (Uncommon)
Tier 3: Orange (Rare)
Weapons and armor made of Hellstone are tier 3. Certain uncraftable weapons are tier 3, such as the Staff of Regrowth. These items are generally rare and high end items, except for the Staff of Regrowth, which generally is only used for cosmetic purposes. Feral Claws and the Flower of Fire are tier 3. These items are rare and usually found later in the game.
Tier 4: Red (Epic)
Most items made of cobalt, mythril, or adamantite bars in the 1.1 update are naturally Tier 4.
Tier 5: Magenta (Legendary)
When a Tier 4 Item is crafted with labels such as "Violent" or "Godly." An example of a Tier 5 item would be a non-prefixed Excalibur. A strong weapon like this is automatically put in a higher tier in comparison to a weaker item.
Tier 6: Purple (Ultimate)
This quality is on late game items such as anything in the Hallowed Set, and some items with top-tier effects, such as Legendary, Mythical and Unreal. This can be achieved by reforging items or looting chests. This does not apply to all top-tier forged items. It is also the rarity of the Console exclusive end game items like Tizona or the Dragon Armour. It is the highest tier achieveable in the game.