West Virginia State Life Insurance Practice Exam

How are distributions from a Roth IRA generally treated for tax purposes?

1. Taxed as ordinary income

2. Subject to capital gains tax

3. Received tax-free

4. Taxed at a reduced rate

The correct answer is: Received tax-free

Distributions from a Roth IRA are generally received tax-free, provided certain conditions are met. The primary requirement is that the account holder must have held the Roth IRA for at least five years and be at least 59½ years old, or if the account holder is disabled, or if distributions are made to a beneficiary after the account holder's death. This tax-free advantage is one of the key benefits of Roth IRAs, encouraging savings for retirement while allowing individuals to withdraw their contributions, and qualified earnings without tax liability. The tax-free nature of Roth IRA distributions fundamentally distinguishes it from other retirement accounts such as traditional IRAs, where distributions are typically taxed as ordinary income. Additionally, capital gains tax does not apply to Roth IRA distributions as qualified earnings are not subject to taxation if they meet the established guidelines. In summary, the reason the correct answer highlights the tax-free treatment of distributions from a Roth IRA reflects the fundamental features of this retirement savings vehicle, which is designed to provide tax advantages for retirement contributions and withdrawals.