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Which of the following statements about Roth Individual retirement accounts (IRAs) is true?

Rationale

Withdrawals are not required during the owner's life.

Roth IRAs allow account holders to withdraw contributions tax-free and do not mandate minimum distributions during the owner's lifetime, providing flexibility in retirement planning.

A (Earnings on the account are taxed annually.) YOUR ANSWER

This statement is incorrect because earnings in a Roth IRA grow tax-free, meaning that account holders do not pay taxes on their investment gains while the funds remain in the account, unlike traditional IRAs where earnings are taxed annually.

B (A tax deduction is permitted on the contributions.) YOUR ANSWER

Contributions to a Roth IRA are made with after-tax dollars, meaning they do not qualify for a tax deduction when made. This contrasts with traditional IRAs, where contributions may be tax-deductible depending on the individual's income and other factors.

C (Withdrawals are taxable after five years.) YOUR ANSWER

This statement is misleading; while contributions can be withdrawn at any time tax-free, the earnings can be withdrawn tax-free only if the account has been open for at least five years and the account holder is over 59½ years old. Therefore, not all withdrawals are taxable after five years.

D (Withdrawals are not required during the owner's life.) CORRECT

This statement is true as Roth IRAs do not require account holders to take minimum distributions during their lifetime, allowing them to let their investments grow without being forced to withdraw funds.

Conclusion

Roth IRAs provide significant advantages, including the absence of required minimum distributions during the owner's life, which grants individuals greater control over their retirement savings. While other statements about Roth IRAs are incorrect or misleading, the ability to choose when to withdraw funds without mandatory requirements is a key benefit that distinguishes them from other retirement accounts.

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