If I find the next Amazon and earn $1 million, will my Roth IRA be taxed?

By Karin Price Mueller | NJMoneyHelp.com for NJ.com

Q. I’m 50 years old and I opened up a Roth and started funding it with the yearly max of $7,000. Let’s say I put the Roth at a brokerage house and use the Roth to buy and sell stocks. After 10 years when I’m 60, let’s say I invested in the next Amazon and it’s now worth $1 million. Would the $1 million be tax free? Is there any situation where taxes would be owed? And how frequently can I trade in the account.

— Investor

A. Let’s start with the rules for IRAs.

You can contribute the lesser of your earned income or $6,000 — or $7,000 if you are over age 50.

Earned income includes salaries, wages or self-employment income, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown.

In order to be able to take a tax deduction for a traditional IRA, there are income and other pension rules, Kiely said. There is no tax deduction for a Roth.

“If you contribute to a deductible IRA you will be required to pay federal and state income taxes on all future withdrawals,” Kiely said. “If you contribute to a non-deductible regular IRA you will have to pay federal and state taxes on the earnings but not on the amount you contributed.”

Contributions and earnings on a Roth IRA are never taxed as long as you wait at least five years from the date of the first contribution before you make a withdrawal, Kiely said.

Now what about trading securities in a regular or Roth IRA?

These rules are set up by the custodian of your IRA. If you are in an account where trading commissions are charged on each trade, the custodian will encourage this practice, Kiely said. Commissions are how the stock broker and firm make their money, he said.

“Some firms are getting away from charging commissions and instead make their money in other ways like investing cash, but keeping most of the interest earned,” he said. “These firms may enact rules on excessive trading in order to keep the account profitable.”

So for the trade you’re suggesting within a Roth, if you hit the jackpot and find the next Amazon, all those earnings are 100% federal and state tax free, Kiely said.

Good luck!

Email your questions to Ask@NJMoneyHelp.com.

Karin Price Mueller writes the Bamboozled column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com’s weekly e-newsletter.