What is a key feature shared by both Roth 401(k) and Roth IRA plans?

A key feature shared by both Roth 401(k) and Roth IRA plans is that qualified distributions are tax-exempt. This means that if the account holder meets certain requirements—primarily, having the account for at least five years and being at least 59½ years old—withdrawals of both contributions and earnings are made without any tax liability. This tax-exempt status is a significant advantage of these accounts, as it allows for tax-free growth and withdrawal, encouraging long-term saving and investment.

In contrast, other options do not apply to both account types. For instance, contributions to both plans are made with after-tax dollars, which means they are not tax-deductible when made. This qualifies them for tax-free withdrawals later, but it does not mean contributions themselves are not taxed. Similarly, there are annual contribution limits for both accounts, which prevent unlimited contributions. Lastly, while both accounts have specific rules regarding withdrawals, premature distributions, particularly from a Roth IRA before certain conditions are met, may incur penalties, which differentiates them from the feature implied in one of the choices.