What type of retirement account is funded with after-tax dollars and grows tax-free?

A Roth IRA is a type of retirement account that is funded with after-tax dollars, meaning that contributions are made after income taxes have been deducted. This is significant because the money contributed to a Roth IRA has already been taxed, allowing for tax-free growth on the account. As the investments in a Roth IRA grow over time, you will not owe any taxes on the earnings, provided that withdrawals are made according to the account's rules, usually after reaching age 59½ and having the account for at least five years. This feature makes the Roth IRA particularly advantageous for individuals who expect to be in a higher tax bracket during retirement than they are currently.

In contrast, traditional IRAs and 401(k) accounts allow for pre-tax contributions, which means taxes are deferred until withdrawal, whereas pension plans are defined benefit plans that provide a fixed payout, not a contribution-based accumulation of investments. Understanding the specific tax implications of these retirement accounts can significantly impact investment strategies and retirement planning.