Which type of IRA allows for tax-free withdrawals after contributions are taxed?

A Roth IRA allows for tax-free withdrawals after contributions have already been taxed. This characteristic is a significant advantage of a Roth IRA as compared to other types of Individual Retirement Accounts (IRAs). When you contribute to a Roth IRA, you are using after-tax dollars, meaning you've already paid income tax on the money being deposited. As a result, when you withdraw funds from a Roth IRA in retirement, including both contributions and any earnings, those withdrawals are tax-free, provided certain conditions are met.

This feature makes Roth IRAs particularly appealing for individuals who expect to be in a higher tax bracket during retirement than they are currently, as it allows them to effectively lock in their current tax rate on contributions rather than facing potentially higher tax rates on withdrawals later. Moreover, Roth IRAs also do not have required minimum distributions (RMDs) during the account holder's lifetime, which offers more flexibility in retirement planning.

In contrast, traditional IRAs and other types of retirement accounts, like Keogh Plans and SEP-IRAs, involve pre-tax contributions that are taxed upon withdrawal, making a Roth IRA's setup distinctly beneficial for those seeking tax diversification in retirement income.