Which statement best describes the taxation of earnings in a Roth IRA?

In a Roth IRA, earnings grow tax-deferred, meaning you do not pay taxes on any interest, dividends, or capital gains while the money is held in the account. The key benefit of a Roth IRA is that when you take qualified withdrawals—typically after age 59½ and once the account has been open for at least five years—those earnings are tax-free. This allows individuals to benefit from tax-free growth over time, making it a powerful tool for retirement savings. The nature of the Roth IRA encourages individuals to invest for the long term, knowing that their withdrawals won't be taxed, provided they meet the requirements.

This understanding of tax benefits is fundamental in personal finance, particularly in retirement planning, because it influences how one might allocate investments across different retirement accounts based on their anticipated tax situation during retirement.