Final answer:
Roth 401(k) and Roth IRA plans allow after-tax contributions, have maximum contribution limits, and are subject to early distribution penalties. Qualified distributions from these retirement accounts are excluded from federal income tax. Correct answer is D. qualified distributions are excluded from federal income tax.
Step-by-step explanation:
The Roth 401(k) and Roth Individual Retirement Account (IRA) are types of retirement savings options that have specific tax features. One key feature of these Roth accounts is that contributions are made with after-tax dollars, meaning contributions are taxed before they are put into the account, but qualified distributions—withdrawals made under certain conditions—are free from federal income tax. However, Roth accounts do have maximum contribution limits and are subject to early distribution penalties under certain circumstances.
Qualified distributions from these accounts are indeed excluded from federal income tax, meaning that once you meet the requirements, you may withdraw your contributions and earnings tax-free. Contrary to what some may think, there are maximum contribution limits set by the IRS, and exceeding these can result in penalties. Finally, while Roth accounts offer tax-free withdrawals in retirement, early distributions taken before age 59½ that do not meet certain exceptions may be subject to taxes and penalties. So, the correct answer is Correct answer is D. qualified distributions are excluded from federal income tax.