How does a Roth iRA work?

[HealthProfessional]

I am currently a college student and am starting to read up on investments and tax-advantage accounts like the Traditional and Roth IRA. However, I am wondering if I can still open and contribute up to the limit (I believe it is $5,000 per year) even if i am not currently working. Also, what prevents someone from going over the $5,000 limit? Does the IRS just fine you if they find out you are contributing over the maximum or does the IRA account you have not let you contribute over the maximum?

 

Also, does anyone know of any forums dedicated to these types of discussions concerning investments and retirement accounts?

 

Thanks!

[Meltz]

These are some good questions, however I can only answer 1 I believe. You cannot contribute the maximum per year which is $5000 without a current job. The IRS can track this by looking at your taxes after you file, if you've made more then $5000 then I'm sure they can't really question you because you could indeed have saved every one of those pennies. The IRS only allows you to contribute income that is EARNED as well as shows on your taxes. You can contribute for this year up to the last day (the deadline) to file taxes for 2012. Which last year was april 17th, not sure if that date changes each year or stays the same, maybe someone can chime in on this. Hope this helps a little bit at least. I'm learning just as you are, I just started contributing last year after taking a personal finance course in college last year as well. Good luck!

[HealthProfessional]

Okay, so what about having the Amex Fidelity Retirement Rewards credit card (which only allows you to deposit the 2% cash back into a Fidelity IRA account)? Will the cash back I earn from this card be safe in my current Roth IRA account even though I do not have a job currently? Can I treat it like a savings account in the case?

[Seabee]

Okay, so what about having the Amex Fidelity Retirement Rewards credit card (which only allows you to deposit the 2% cash back into a Fidelity IRA account)? Will the cash back I earn from this card be safe in my current Roth IRA account even though I do not have a job currently? Can I treat it like a savings account in the case?

 

It isn't a savings account so you cannot treat it like one. There's nothing the IRS can do to prevent you from making an excess contribution, but they'll be happy to collect the 6% additional tax per year on that excess contribution.

[Kevin20]

Okay, so what about having the Amex Fidelity Retirement Rewards credit card (which only allows you to deposit the 2% cash back into a Fidelity IRA account)? Will the cash back I earn from this card be safe in my current Roth IRA account even though I do not have a job currently? Can I treat it like a savings account in the case?

 

 

Let's be clear -- by law you can only contribute earned income into an IRA of either type. That is, money you make by having a job for the calendar year -- the money that will be reported as wages on your W-2 form. The max you can contribute is $5000 OR the total of your earned income, whichever is lower. If you have a part-time job and earn only $4000, that's the most you can contribute. That rule certainly does not change if you have a credit card linked to your account, or whatever.

 

No one will investigate to verify that you actually have a job, but keep in mind, when you opened the account you filled out an app that includes your social security number. The investment firm takes your SSN specifically to report things to the IRS. You cannot avoid this. You MIGHT be able to cheat the system and put unearned income into an IRA, but it would probably bite you in the @ss, so you should not attempt it.

 

Furthermore, IRA's are nice but it's hardly worth trying to game the system just to get money in an IRA. I applaud your desire to save and invest, but if you want to invest and have the funds for it, then just open a regular brokerage account. If you hold long term more than a year you get a tax break on capital gains (depending on the vicissitudes of tax law at the time of course).

Edited August 30, 2012 by Kevin20

[HealthProfessional]

Okay, so what about having the Amex Fidelity Retirement Rewards credit card (which only allows you to deposit the 2% cash back into a Fidelity IRA account)? Will the cash back I earn from this card be safe in my current Roth IRA account even though I do not have a job currently? Can I treat it like a savings account in the case?

 

 

Let's be clear -- by law you can only contribute earned income into an IRA of either type. That is, money you make by having a job for the calendar year -- the money that will be reported as wages on your W-2 form. The max you can contribute is $5000 OR the total of your earned income, whichever is lower. If you have a part-time job and earn only $4000, that's the most you can contribute. That rule certainly does not change if you have a credit card linked to your account, or whatever.

 

No one will investigate to verify that you actually have a job, but keep in mind, when you opened the account you filled out an app that includes your social security number. The investment firm takes your SSN specifically to report things to the IRS. You cannot avoid this. You MIGHT be able to cheat the system and put unearned income into an IRA, but it would probably bite you in the @ss, so you should not attempt it.

 

Furthermore, IRA's are nice but it's hardly worth trying to game the system just to get money in an IRA. I applaud your desire to save and invest, but if you want to invest and have the funds for it, then just open a regular brokerage account. If you hold long term more than a year you get a tax break on capital gains (depending on the vicissitudes of tax law at the time of course).

Thanks for your post Kevin20. Yes, I think I will end up just opening a regular brokerage account at Fidelity.

 

However, I've also recently came across SEP-IRAs and other similar retirement investment accounts for people who are self-employed. I do currently have a small business as an Amazon seller, which generates some income. Could I possible contribute this to one of the IRA accounts designed for self-employers?

 

 

[Seabee]

Okay, so what about having the Amex Fidelity Retirement Rewards credit card (which only allows you to deposit the 2% cash back into a Fidelity IRA account)? Will the cash back I earn from this card be safe in my current Roth IRA account even though I do not have a job currently? Can I treat it like a savings account in the case?

 

 

Let's be clear -- by law you can only contribute earned income into an IRA of either type. That is, money you make by having a job for the calendar year -- the money that will be reported as wages on your W-2 form. The max you can contribute is $5000 OR the total of your earned income, whichever is lower. If you have a part-time job and earn only $4000, that's the most you can contribute. That rule certainly does not change if you have a credit card linked to your account, or whatever.

 

No one will investigate to verify that you actually have a job, but keep in mind, when you opened the account you filled out an app that includes your social security number. The investment firm takes your SSN specifically to report things to the IRS. You cannot avoid this. You MIGHT be able to cheat the system and put unearned income into an IRA, but it would probably bite you in the @ss, so you should not attempt it.

 

Furthermore, IRA's are nice but it's hardly worth trying to game the system just to get money in an IRA. I applaud your desire to save and invest, but if you want to invest and have the funds for it, then just open a regular brokerage account. If you hold long term more than a year you get a tax break on capital gains (depending on the vicissitudes of tax law at the time of course).

Thanks for your post Kevin20. Yes, I think I will end up just opening a regular brokerage account at Fidelity.

 

However, I've also recently came across SEP-IRAs and other similar retirement investment accounts for people who are self-employed. I do currently have a small business as an Amazon seller, which generates some income. Could I possible contribute this to one of the IRA accounts designed for self-employers?

 

Net income from self employment is earned income for a traditional or ROTH IRA also, and with those you can contribute 100% of your earned income (up to contribution limits, of course) where with the SEP you can only contribute up to 25% of your net self employment.

[HealthProfessional]

Net income from self employment is earned income for a traditional or ROTH IRA also, and with those you can contribute 100% of your earned income (up to contribution limits, of course) where with the SEP you can only contribute up to 25% of your net self employment.

 

Okay, so let's say that I earned $300 by selling items on Amazon on July of this year (2012), can I just go ahead and deposit $300 into a Roth IRA now (September 2012)? The deadline to for 2012 Roth IRA contributions is April 15, 2013 correct? Also, does one always need to file a tax return if one contributes to their Traditional/Roth IRA? Will I need to file a 2012 tax return on my Amazon seller earnings (i.e. $300) on tax day (April 15, 2013) of next year? Any online sales should be reported on a tax return as self-employed income taxed at the lowest tax bracket, correct?

 

 

Sorry for all of the questions, but I'm really a newbie to all of this.

Edited September 6, 2012 by HealthProfessional

[Seabee]

Net income from self employment is earned income for a traditional or ROTH IRA also, and with those you can contribute 100% of your earned income (up to contribution limits, of course) where with the SEP you can only contribute up to 25% of your net self employment.

 

Okay, so let's say that I earned $300 by selling items on Amazon on July of this year (2012), can I just go ahead and deposit $300 into a Roth IRA now (September 2012)? The deadline to for 2012 Roth IRA contributions is April 15, 2013 correct? Also, does one always need to file a tax return if one contributes to their Traditional/Roth IRA? Will I need to file a 2012 tax return on my Amazon seller earnings (i.e. $300) on tax day (April 15, 2013) of next year? Any online sales should be reported on a tax return as self-employed income taxed at the lowest tax bracket, correct?

 

 

Sorry for all of the questions, but I'm really a newbie to all of this.

 

What are you selling on Amazon, and how did you obtain those items that you sold? Remember that you're looking at NET self-employment income, so you need to take COGS into account, as well as shipping costs. If you were just selling some books that you had around the house, that would be a capital transaction, not self employment.

[HealthProfessional]

What are you selling on Amazon, and how did you obtain those items that you sold? Remember that you're looking at NET self-employment income, so you need to take COGS into account, as well as shipping costs. If you were just selling some books that you had around the house, that would be a capital transaction, not self employment.

 

First of all, thank you for taking your time to answer all of my questions. I really appreciate it.

 

As to your question, most of these items are electronics that I have bought at a lower price and resold, but some are items/books that I purchased a while back. I have been reading about the possibility of receiving the qualifying earned income for IRA contribution purposes through money gained from doing chores around the house. Would i just be able to contribute a matching amount of this without any other actions, or do my parents and/or I need to also file appropriate forms for documentation?

Edited September 7, 2012 by HealthProfessional

[Seabee]

What are you selling on Amazon, and how did you obtain those items that you sold? Remember that you're looking at NET self-employment income, so you need to take COGS into account, as well as shipping costs. If you were just selling some books that you had around the house, that would be a capital transaction, not self employment.

 

First of all, thank you for taking your time to answer all of my questions. I really appreciate it.

 

As to your question, most of these items are electronics that I have bought at a lower price and resold, but some are items/books that I purchased a while back. I have been reading about the possibility of receiving the qualifying earned income for IRA contribution purposes through money gained from doing chores around the house. Would i just be able to contribute a matching amount of this without any other actions, or do my parents and/or I need to also file appropriate forms for documentation?

 

I can't imagine using money gained from chores to qualify, but I'm sure you can find someone who would disagree. It feels like that type of income would be more appropriately reported as other income. If it's over $400, you should be sure to file with a Schedule C. Hopefully the IRS crosschecks IRA contributions vs earned income reported on your return. It sounds to me like you're pushing the limits, with little benefit and significant potential penalty if the IRS disagrees with how you decide to classify your income. Much safer to get a part-time job with very light hours and just contribute 100% of those earnings up to the limit.

[Kevin20]

What are you selling on Amazon, and how did you obtain those items that you sold? Remember that you're looking at NET self-employment income, so you need to take COGS into account, as well as shipping costs. If you were just selling some books that you had around the house, that would be a capital transaction, not self employment.

 

First of all, thank you for taking your time to answer all of my questions. I really appreciate it.

 

As to your question, most of these items are electronics that I have bought at a lower price and resold, but some are items/books that I purchased a while back. I have been reading about the possibility of receiving the qualifying earned income for IRA contribution purposes through money gained from doing chores around the house. Would i just be able to contribute a matching amount of this without any other actions, or do my parents and/or I need to also file appropriate forms for documentation?

 

Again -- I applaud your interest in saving. Most people have the opposite attitude. But think about the costs (of effort and risk) versus the benefit (of gaining a tiny amount of potential tax benefit). You're getting into a lot of contortions to justify putting a small amount of money into an IRA. Your actual tax-deferred tax benefit on those amounts is very small. You're getting into territory where I'd already say "consult an account for those kinds of arcane details". And accountants aren't cheap.

 

If you wind up someday having to hire an accountant to unravel things, or face tax penalties for doing something wrong, that blows away any potential gain on putting a few hundred bucks into an IRA instead of an "unqualified" account.

 

If I were you I'd do this: just save the money you can save in the bank. Accumulate some cash to work with. Then, the very moment you graduate into a "real" job and have firmly proven earned income you can dump $5000 right away into a Roth IRA (if you have that much cash, and on the assumption you don't immediately lose your job), as well as sign up for a 401k and put in as much as you can. Of course you may find you need to use those savings ... perhaps to move to wherever your new job is or whatever. If so, you won't have to yank money out of your IRA, which introduces further tax complications.