Episode #1 - Intro and Tax Time

Take advantage of the July 15, 2020 tax deadline - or simply learn one way you can save money now so you can have it in the future!

Welcome to Winnings!

Introduction:

Personal finance might be the most important work you take on outside of your personal relationships and mental health. The goal of this letter is that you move from reading about financial ideas to action. So let’s go!

With the first bear market (click these links as they’ll help you learn) in a while upon us, you may just have the chance of a lifetime to get your financial house in order.

Disclaimer:

This dispatch is going out in the midst of the Covid-19 pandemic. All essential workers, doctors, garbage disposal professionals, fast food delivery people, and those producing the many different necessities in our world, massive kudos to you. You may not have time to follow these principles now, but I hope you get the time to catch up on these in the months after things arrive at a new normal. Second disclaimer, I am not a certified financial adviser and I’m not looking to replace the one you do (or don’t) have already. These people can definitely help you, but sometimes you’re just not even at the point where you know what to ask - and I’m trying to get your to that place.

Today’s Topic:

One of the updates to US taxpayer life as a result of Covid-19 was a delay of the April 15, 2020 “tax day” to July 15, 2020. This adjustment will hopefully enable you to save some money now so you can pay your bills, but may also enable you to put away money into an IRA or a Roth IRA. Don’t know what that is? Now is your chance to learn!

History Lesson:

Traditional IRA and Roth IRA (if you’re over 60, pronounced “Ira” like “your Uncle Ira” and if you’re under 60, “I.R.A” like “you love/hate the NRA”) stands for individual retirement account. There are a few other types and if you’d like bonus points, check out the Wikipedia page. The Traditional IRA comes in the form of a contribution from your cash money into a special IRA account with major banks (Schwab, Vanguard, Fidelity to name a few) and whatever money you put into your account is TAX-DEDUCTIBLE for this year. For example, if you made $50,000 this year and you put away $3,000 into your Traditional IRA, you’d only be taxed for $47,000. However, when you take out money from this account (only after you turn 59.5, but that can change), you are taxed at your rate of income from the time of withdrawal.

Roth IRA’s are named after Senator William Roth Jr. Most significantly for you, when you put away money into this type of account you’d still pay your regular taxes on your 2019 $50,000 income. However, when time comes to take the money out of this IRA, you don’t take any taxes for your capital gains.

Please do not forget: Once you deposit money into an IRA account, you can “play the stock market” the same way you would with any investment account. You would not be advised to play the stock market the way you’ve seen in movies, rather you should find index funds that generally track the market, but I’ll cover those in future episodes of Winnings.

A picture is worth a thousand words:

(Thank you to the folks at www.moneyunder30.com/ for this handy chart UPDATE: Thank you to two readers who pointed out errors on this chart 1) Trad IRA withdrawals are now required after 72 2) there are no longer age restrictions for Trad IRA contributions, 3) your contributions to IRA’s are not ALWAYS tax deductible, and you can contribute even w/o a tax deduction! 4) the NEW limit for IRA’s is $6,000 not $5,500.)

Takeaway:

One of the most effective ways to build a retirement nest-egg and save on taxes (either this year or when you withdraw your winnings) is by putting money in an IRA and then investing it (if that scares you, stay tuned for an upcoming letter). Which type of IRA? As with many things, it depends. This article provides a helpful summary of your options. As recommended in the article, Roth IRA is likely your better option, but if you have specific guidance from a tax professional, you should take that seriously.

Interact:

Do you have either types of these accounts? Do you want to learn how to create an account? I’d love to feature what people have done (or have not done). If you’d like to share what you’ve done or ask any questions, please email takewinnings@gmail.com!