Mutual fund Roth IRA?

Question

I don't really understand how it works. I contributed (2 years) $6,000 into two mutual funds under vanguard. Now, if my mutual funds grow really fast wouldn't that exceed my contributions? Are contributions just income money? How does buying stock under a Roth work you can't take that money out can you?

Answer 1

A Roth IRA is where your investments grow tax-deferred and withdrawals may be tax-free after age 59 1/2. Why I say "may be" because there is a 5 year holding period on Roth IRAs. If you open your very first Roth IRA at age 60, you have to wait 5 years until you can withdraw the earnings tax-free. If you withdraw money during those 5 years, you will pay income tax on the earnings. For example, lets say you open your first Roth IRA on December 10, 2006. Your 5 year holding period started on January 1, 2006 and ends on December 31, 2010. If you make withdrawals during these 5 years, you will pay income tax on the earnings, but not on your contributions.

If you make withdrawals before age 59 1/2, you will pay a 10% penalty and possibly income tax as well on the earnings (if you withdraw money during the first 5 years). There are some exceptions to that rule:
1) You may make withdrawals before age 59 1/2 if you become permanently disabled.
2) If you die before age 59 1/2, your estate or your beneficiary will not be affected by the rule.
3) You may make withdrawals to pay for non-reimbursed medical expenses IF AND ONLY IF the expenses exceeds 7.5% of you adjusted gross income (AGI, which means your gross income after all qualifying deductions are made)
4) You may make withdrawals up to $10,000 for purchase, building, or rebuilding of your first home. This can include children, grandchildren, and your spouse if you already bought your first home.
5) You may make withdrawals to pay for higher education expenses. This can include you, your children, and your grandchildren.
6) If you are out of a job and have medical insurance, you may make withdrawals to pay the premium.

When your mutual fund has capital gains and dividends, these are not included as part of your contribution. Only what you put in is counted as contributions. WHEN YOU MAKE WITHDRAWALS ON YOUR CONTRIBUTIONS AT ANYTIME, YOU DO NOT OWE ANY INCOME TAX OR PAY ANY PENALITIES ON THEM!

As for putting individual stocks into your Roth IRA. Don't do it. Base on what I see from my clients that own stock, they had very little growth or they lost money. Stocks are highly volatile and you don't want that kind of risk in your retirement account. Stick with mutual funds and bonds. As I mention above, if there are gains on your stocks, you will pay income taxes on the gains if you make withdrawals during the 5 year holding period and if you make withdrawals before age 59 1/2, you will pay a 10% penalty too.

If you lose value or have a loss in your Roth IRA, you can't make them tax-deductible until you withdraw money. You should talk to tax advisor if this happens.

Answer 2

ISO you are not quite correct. For a ROTH IRA, you can take out your contributions at anytime, no taxes, no penalty. It's only earnings you must wait for until 59 1/2 years old (with certain exceptions). The exception to this is a 5 year waiting period on all money if the ROTH IRA was a rollover from a traditional IRA.

To the original question. If your mutual funds grow really fast wouldn't that exceed my contributions? NO because the growth is not your contributions, it is the earnings of the mutual funds.

Your contributions must not exceed your earned income.
Buying a stock under a ROTH IRA - you take the money out of the ROTH at 59 1/2 or later. If you want to sell the stock before that, you can, just transfer it to a money market fund, another stock, a mutual fund, a bond, a CD etc, just so long as they are all still within a ROTH IRA. I just tell my broker, "Within my ROTH IRA, I want to transfer money from ABC fund to XYZ fund."

Answer 3

There are limitations on how much money you can put into an IRA; that has nothing to do with the balance. Hopefully it will grow quite well!

As far as income, the money you've put into an IRA won't become "income" until you take it out. And the type of IRA you have determines WHEN that money is taxed.

If you have a traditional IRA, then you put the money in pre-tax and you pay taxes on it when you take it out. (If you take it out before age 59 1/2, except for some very specific circumstances, you'll have to pay a 10% penalty on it in addition to the taxes.)

If you have a Roth IRA (which it sounds like you do), then you pay taxes up front on the money you put into your account. Therefore, as long as you take it out after age 59 1/2, you won't pay taxes on the money when you take it out. Again, you can only take it out for certain circumstances unless you're willing to pay the penalties on it.

You can find more specifics on the web site below.

Answer 4

If the Roth IRA owner expects that the tax rate applicable to withdrawals from a traditional IRA in retirement will be higher than the tax rate applicable to the funds earned to make the Roth IRA contributions before retirement, then there may be a tax advantage to making contributions to a Roth IRA over a traditional IRA or similar vehicle while working.

Answer 5

mutual fund roth ira

Answer 6

That 5 year period you mentioned does that mean as long as you have had a Roth for at least 5 years any money you put in it during and after the 5 years is not taxed upon you taking money out?

Answer 7

I think that you can only put 4,000 in a roth per yer regaurdless of how it performs, and I think that you can't take it out for like 5 years or something like that, I'm not too sure though. Next time you go to your bank ask them.

Answer 8

yes