How are contributions made to Roth IRAs treated for tax purposes?

Contributions made to Roth IRAs are not taxed as income at the time they are contributed, as they are made with after-tax dollars. This means individuals do not receive a tax deduction for Roth IRA contributions, but the account grows tax-free.

Tax-deferred growth typically refers to accounts like traditional IRAs or 401(k) plans, where taxes are postponed until withdrawals are made. In contrast, Roth IRAs allow for tax-free growth, meaning any earnings within the account are not subject to taxes as long as certain conditions are met.

Additionally, withdrawals from Roth IRAs are tax-free after age 59½, provided that the account holder has had the account for at least five years. This aspect of Roth IRAs is a significant incentive since it allows individuals to enjoy their accumulated earnings without any tax implications.

Understanding these fundamental components clarifies why the correct treatment for contributions to Roth IRAs, which is the focus of the question, emphasizes the unique tax advantages associated with them, particularly in relation to tax-free growth and withdrawals.