How are contributions made to a Roth IRA handled for tax purposes?

Contributions made to a Roth IRA are not tax deductible. This means that when individuals make contributions to their Roth IRA, they do so with after-tax dollars—meaning the money has already been taxed at their ordinary income tax rate. As a result, these contributions do not reduce the taxpayer's gross income for the year in which they are made.

The benefit of this arrangement is that qualified withdrawals from the Roth IRA, including earnings, are tax-free, provided certain conditions are met, such as the account being held for at least five years and the account owner being at least 59½ years old when withdrawals begin. This tax structure promotes long-term savings by allowing individuals to pay taxes upfront while benefiting from tax-free growth and withdrawals in retirement.

The implications of this arrangement are significant for retirement planning, as it enables individuals to manage their tax liabilities effectively. The other options imply that contributions either reduce taxable income now or have a different tax treatment, which is not the case for Roth IRAs.