Which retirement account is funded with after-tax dollars and allows tax-free withdrawals of qualified earnings?

Which retirement account is funded with after-tax dollars and allows tax-free withdrawals of qualified earnings?

• A. Traditional IRA
• B. Roth IRA
• C. 403(b)
• D. 529 plan

Answer: (B)

Roth IRAs are funded with after-tax dollars, and the key benefit is that withdrawals of earnings are tax-free if the distribution is qualified. A qualified withdrawal means you’ve had the account for at least five years and you’re at least 59½ (or you meet certain other conditions like disability or a first-time home purchase). Because you paid taxes on the contributions up front, you won’t owe taxes on the earnings when you take a qualified distribution. You can also withdraw the contributions themselves tax-free at any time since they were already taxed, though the tax-free rule mainly applies to the earnings portion. This fits the description best because the other options operate on different tax setups: a traditional IRA typically gives you a tax deduction upfront and taxes withdrawals later; a 403(b) is usually funded with pre-tax contributions and taxed on withdrawal; a 529 plan grows tax-free for education expenses, not retirement.

Roth IRAs are funded with after-tax dollars, and the key benefit is that withdrawals of earnings are tax-free if the distribution is qualified. A qualified withdrawal means you’ve had the account for at least five years and you’re at least 59½ (or you meet certain other conditions like disability or a first-time home purchase). Because you paid taxes on the contributions up front, you won’t owe taxes on the earnings when you take a qualified distribution. You can also withdraw the contributions themselves tax-free at any time since they were already taxed, though the tax-free rule mainly applies to the earnings portion.

This fits the description best because the other options operate on different tax setups: a traditional IRA typically gives you a tax deduction upfront and taxes withdrawals later; a 403(b) is usually funded with pre-tax contributions and taxed on withdrawal; a 529 plan grows tax-free for education expenses, not retirement.