What type of retirement account allows for tax-free growth on investments?

The Roth IRA is a type of retirement account that allows for tax-free growth on investments. In a Roth IRA, individuals contribute after-tax dollars, meaning that they've already paid income tax on the money they put in. The significant advantage comes during the withdrawal phase: as long as certain conditions are met, qualified withdrawals—including both contributions and earnings—are tax-free. This tax structure is particularly beneficial for those who expect to be in a higher tax bracket during retirement than they were at the time of contribution.

In contrast, Traditional IRAs, 401(k)s, and Simple IRAs offer tax-deferred growth, meaning that taxes on the earnings are postponed until distribution. While these accounts provide immediate tax benefits upon contribution, withdrawals are taxed as ordinary income at the individual's tax rate during retirement. Thus, the key distinguishing feature of a Roth IRA is the combination of tax-free growth on investments and the ability to withdraw contributions tax-free at any time, making it a compelling choice for long-term retirement planning.