How are contributions to a Roth IRA treated for tax purposes?

• A. They are tax-deductible in the year they are contributed
• B. They grow tax-deferred until withdrawal
• C. They are made with after-tax dollars, and earnings are tax-free
• D. They are subject to capital gains tax upon withdrawal

Answer: (C)

Contributions to a Roth IRA are made with after-tax dollars, meaning that individuals do not receive a tax deduction for the contributions in the year they are made. Instead, the key feature of a Roth IRA is that the earnings on these contributions grow tax-free, and qualified withdrawals in retirement are also tax-free. This structure encourages saving for retirement since individuals can access their funds without further tax liability, thus providing a significant tax advantage. The combination of making contributions with after-tax income and receiving tax-free growth and withdrawals makes Roth IRAs an attractive option for retirement savings.