What type of retirement account allows contributions to be taxed, enabling tax-free withdrawals in retirement?

A Roth IRA is a type of retirement account that allows individuals to contribute money that has already been taxed. This means that when you make contributions to a Roth IRA, you do so with after-tax dollars. One of the most significant advantages of a Roth IRA is that, upon reaching retirement age, the money in the account can be withdrawn tax-free, including both contributions and earnings, provided certain conditions are met.

This structure is beneficial for individuals who anticipate being in a higher tax bracket in retirement or who prefer the certainty of tax-free withdrawals in the future. Unlike other retirement accounts, such as a Traditional IRA or a 401(k), where contributions may be tax-deductible but withdrawals are taxed as ordinary income, a Roth IRA provides the opposite tax treatment, making it an attractive option for long-term tax planning.