Which retirement account provides tax-free treatment of earnings?

The Roth IRA is distinct among retirement accounts due to its unique tax structure that allows for tax-free treatment of earnings. Contributions to a Roth IRA are made with after-tax dollars, meaning tax has already been paid on the money before it goes into the account. As a result, any investment earnings within the Roth IRA grow tax-free, and qualified withdrawals during retirement are also tax-free. This approach provides a significant advantage for individuals who expect to be in a higher tax bracket during retirement or those who want to minimize tax implications on their investment growth.

In contrast, other retirement accounts such as the Traditional IRA and Keogh Plan provide tax-deferred growth. This means that taxes on earnings are deferred until funds are withdrawn, typically during retirement when the individual may be in a lower tax bracket. Similarly, a pension plan generally provides income during retirement without offering the same tax-free growth on investment earnings enjoyed with a Roth IRA. Hence, the Roth IRA stands out for its tax-free growth component, making it a favorable option for many individuals saving for retirement.