Series 7 practice questioneasyRetirement Accounts — Roth IRA Characteristics
Which of the following best describes the tax treatment of a Roth IRA?
- AContributions are tax-deductible and withdrawals are taxed as ordinary income
- BContributions are tax-deductible and withdrawals are tax-free
- CBoth contributions and withdrawals are tax-free
- DContributions are made with after-tax dollars and qualified withdrawals are tax-free✓ Correct answer
Explanation
Why D — Contributions are made with after-tax dollars and qualified withdrawals are tax-free
Roth IRA contributions are made with after-tax dollars (they are not tax-deductible). The key benefit is that qualified distributions, including investment gains, are completely tax-free as long as the account has been open for at least five years and the owner is at least 59 1/2. This makes Roth IRAs particularly attractive for individuals who expect to be in a higher tax bracket in retirement.
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