Colorado Life Producer License Practice Test

Which type of retirement account grows tax-free after 5 years?

1. Traditional IRA

2. 401K

3. Roth IRA

4. Annuity Fund

The correct answer is: Roth IRA

The Roth IRA is specifically designed to provide tax-free growth on investments, provided the account has been open for at least five years and certain conditions are met. Contributions to a Roth IRA are made with after-tax dollars, which means that while you won't receive a tax deduction when you contribute, your money can grow without being taxed as long as you follow the rules regarding distributions. Once the five-year period has elapsed, qualified distributions—such as those made during retirement or those taken after reaching age 59½—can be withdrawn tax-free. This feature makes the Roth IRA particularly attractive for long-term savers, as it allows individuals to avoid taxes on both the contributions and the earnings during their retirement years. In comparison, traditional IRAs and 401(k)s offer tax-deferred growth, meaning taxes are due upon withdrawal in retirement. Annuities can have various tax implications depending on the type and specific features, but they do not inherently provide the same tax-free growth structure as a Roth IRA after five years.