What is the tax implication of a withdrawal from a Roth IRA?

The tax implication of a withdrawal from a Roth IRA being tax-free and penalty-free if the account has been open for at least five years is accurate due to the unique tax structure of Roth IRAs. Contributions to a Roth IRA are made with after-tax dollars, meaning that taxes have already been paid on the money before it is deposited into the account.

When it comes to withdrawals, as long as the account holder is at least 59½ years old and the account has been open for at least the required five-year period, both contributions and earnings can be withdrawn without incurring income tax or penalties. This feature makes Roth IRAs attractive for tax planning, especially for those who expect to be in a higher tax bracket in retirement or wish to leave tax-free assets to their heirs.

This option reflects the fundamental design of Roth IRAs to encourage long-term savings while providing tax benefits upon retirement, differentiating it from traditional IRAs where withdrawals are typically taxed as ordinary income. Other options do not accurately represent the tax treatment of Roth IRA withdrawals, especially concerning the five-year rule and the eligible age for penalty-free distributions.