How are distributions from a Roth IRA typically taxed?

Distributions from a Roth IRA are typically tax-free, which is why this choice is the correct one. The key feature of Roth IRAs is that contributions are made with after-tax dollars, meaning taxes have already been paid on the money contributed. As a result, qualified distributions—those taken after the age of 59½ and after at least five years since the first contribution—are not subject to federal income tax. This makes the Roth IRA a valuable tool for individuals looking to grow their retirement savings without the burden of future taxation on their withdrawals, provided they meet the necessary conditions.

The tax-free nature of Roth IRA distributions is an important distinction when planning for retirement. This benefit allows individuals to have a portion of their retirement funds that can be withdrawn without additional tax liabilities, enhancing their overall financial strategy in retirement.