Which account type provides tax-free growth of earnings?

Which account type provides tax-free growth of earnings?

• A. Traditional 401(k).
• B. Taxable brokerage account.
• C. Roth IRA.
• D. Savings account.

Answer: (C)

Tax-free growth of earnings comes from accounts where the investment gains inside the account aren’t taxed as they accrue, and withdrawals of those gains are tax-free if you meet specific rules. A Roth IRA is funded with after-tax dollars, so the money inside can grow without taxes on the earnings, and qualified withdrawals are tax-free. To owe no tax on the earnings upon withdrawal, you generally must be at least 59.5 years old and have had the account for at least five years. By contrast, a traditional 401(k) grows tax-deferred but withdrawals are taxed as ordinary income, a taxable brokerage account triggers taxes on dividends and capital gains as they occur, and a savings account earns interest that’s taxed annually. So the Roth IRA best provides tax-free growth of earnings.

Tax-free growth of earnings comes from accounts where the investment gains inside the account aren’t taxed as they accrue, and withdrawals of those gains are tax-free if you meet specific rules. A Roth IRA is funded with after-tax dollars, so the money inside can grow without taxes on the earnings, and qualified withdrawals are tax-free. To owe no tax on the earnings upon withdrawal, you generally must be at least 59.5 years old and have had the account for at least five years. By contrast, a traditional 401(k) grows tax-deferred but withdrawals are taxed as ordinary income, a taxable brokerage account triggers taxes on dividends and capital gains as they occur, and a savings account earns interest that’s taxed annually. So the Roth IRA best provides tax-free growth of earnings.