Apr 21

I don’t completely understand exactly how they work at all, to be honest. But my math teacher recently showed us that contributing a couple thousand dollars a year every year for about 10 years at least 40 years before retiring could end up giving you over a million dollars upon retirement. Now, I see it’s not quite so simple. I have several questions….

1) Do taxes play any part in Roth IRAs? Or is it just you deposit, watch it grow by the rate, and then withdraw the exact amount?
2) Can a minor make an account? According to this – http://www.kiplinger.com/columns/drt/archive/2008/dt080130.html, it appears it is possible. However, it also seems that you need an income to put money into it. Would buying/selling misc. things (some virtual goods, others real goods) over the internet qualify as an income that I could cite if putting money into a Roth IRA?
3) How often is the interest compounded? Or does it vary?
4) What’s the rate? Or does it vary?
5) Are you guaranteed anything, or is it possible your money will all disappear?

2 comments so far...

  • Wayne Z Said on April 21st, 2010 at 12:28 pm:

    1) Roths are funded with after tax dollars. Taxes only come in to play if you take it out early.
    2) Yes, but you must have “earned income”. Earned Income is income from wages/salary or self-employment. Just selling things laying around the house would not count but, if you were purchasing items for resale as a business, that would count. However, you would be required to pay taxes on this income.
    3) It depends. Most money market accounts are compounded daily but you would not want your Roth IRA in a money market account if you are young. You would want it in stocks; preferably stock mutual funds. Those do not pay interest but they do pay dividends quarterly. There is also the capital appreciation of the underlying stocks.
    4) It varies based on the underlying investments.
    5) You always want some risk because risk = reward. However, if you get too risky, you could lose everything. A friend of mine invested a few thousand dollars in a Roth IRA and he purchase one stock. That company eventually went under leaving him with nothing.

  • STEVEN F Said on April 21st, 2010 at 12:37 pm:

    An IRA, Roth or Traditional, works exactly the same for a minor or an adult. You can only contribute up to your EARNED income. Buying and selling IS income if you sell form more than you buy for. There is NO interest rate. An IRA is NOT an investment. It is a SHELL that holds investments sheltered from taxes. The actual investment INSIDE the account can be nearly ANY investment and carry the same risks and benefits as the same investments OUTSIDE of an IRA.

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