How Does a Roth IRA Compound Interest?

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A Roth IRA compounds interest by growing without taxation, and the individual gets to decide when to take it out. Find out how Roth IRAs work with help from a licensed insurance agent in this free video on retirement planning and personal finance.

Part of the Video Series: Retirement Planning
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Video Transcript

Hi, my name is Bill Rae. I'm a licensed agent and have been in the financial field for well over two decades. We're going to talk about how does a Roth IRA compound interest. That's an excellent question. Quite frankly, what I suggest we do is perhaps start with the basic understanding of what is a Roth IRA, strange sounding name. Let me explain the simplest way I've learned how to explain what a Roth IRA is. Suppose I held in my hands today ten seeds of corn in each hand. In this hand with ten seeds, you agree to the government that you won't pay them tax on the ten seeds today, but whatever the corn grows to, they'll get their fair share then. Roth, however you say, let me pay a little bit of tax on the ten seeds today and whatever I grow it to, you don't get any. The choice is yours. Let's suppose these ten ears of corn each grew to a thousand ears of corn. Which one would you rather pay taxes on? This one, where the government gets a good share, or this one where you've already paid. You pay no taxes on those ear corns. And how does a distribution work then, simply distribution will work again like any other vehicle when you decide to pull money out as it's growing I should say, the interest grows without taxation. And when you decide to take it out, you tell us when, where and how. That's the distribution of a Roth IRA. I'm Bill Rae helping you build wealth.

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