Which statement best describes Roth IRA tax treatment?

• A. Traditional IRA contributions are made with after-tax dollars, and withdrawals are tax-free.
• B. Roth IRA contributions are made with after-tax dollars, and withdrawals are tax-free.
• C. Both Traditional and Roth IRA contributions are tax-deductible.
• D. Roth IRA withdrawals are taxed, while Traditional IRA withdrawals are tax-free.

Answer: (B)

The key idea is how Roth IRA tax treatment works: you pay taxes on contributions now, and qualified withdrawals are tax-free. With a Roth, contributions are made with after-tax dollars, so you don’t get a tax deduction up front. Because you’ve already paid taxes on those amounts, you can withdraw your principal at any time tax-free. More importantly, if you meet the rules for a qualified distribution—being at least 59½ and having the account open for at least five years—both the contributions and the earnings come out tax-free. This is different from a Traditional IRA, where contributions may be deductible now (reducing your current taxes) but withdrawals later are taxed as ordinary income. So statements claiming both IRAs are deductible, or that Roth withdrawals are taxed, don’t fit the actual rules.