What is the key characteristic of a Roth IRA?

The key characteristic of a Roth IRA is that earnings are tax-free upon withdrawal, while contributions are made with after-tax dollars and are not tax-deductible. This means that individuals pay taxes on the money they contribute but do not pay taxes on any earnings or growth that the investments generate within the account, provided certain conditions are met at the time of withdrawal, such as being over age 59½ and having the account for at least five years.

This characteristic distinguishes a Roth IRA from other types of retirement accounts, like traditional IRAs, where contributions may be tax-deductible and taxes are deferred until withdrawal. In the case of a Roth IRA, while there is no immediate tax benefit when contributing, the benefit comes during retirement when qualified withdrawals are made without any tax liabilities on earnings.

Furthermore, the option noting that all amounts in a Roth IRA are taxed every year is incorrect, as the essence of a Roth IRA is the tax-free growth and tax-free withdrawals.