Tax Fraud, But Legal

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"In this world, nothing can be said to be certain except death and taxes." - Benjamin Franklin

Tax Fraud, But Legal

You know the drill. Get your paycheck and wonder "what the hell, where is the rest of my money?"

Considering that in 2021 the average single worker paid 28.4% in taxes, it's easy to see why many of us often cuss Uncle Sam for taking "his share." Which in 2019, was $1.6 trillion in income taxes alone.

On top of this, in the investing world, we have what is called capital gains tax. This is a tax that is applied when you sell an asset for a profit.

Short Term Capital Gains - Taxed at your ordinary income tax rate.

Long Term Capital Gains - When you hold an asset for over a year. Taxed at 0%, 15%, or 20% depending on your income. Usually, this rate is lower than the short term rate.

But what if I told you there was a way to avoid all capital gains tax...legally.

The Roth

Introducing the man, the myth, the legend, the Roth IRA.

Created in 1997 by the Taxpayer Relief Act (laughs in government) and put into effect in 1998 the Roth IRA has become one of the most well know retirement accounts. This investing vehicle gives people a tax-advantaged account where they can let their money grow away from Uncle Sam's slimy hands.

Here is how they work.

A Roth IRA can be opened through almost any brokerage. The money used to fund a Roth will be post-tax earned income. Yes, unfortunately this means you have to pay your normal share of income taxes.

There is also a limit on contributions. For the 2022 tax year, ending in April, you cannot contribute more than $6,000 to your Roth (or $7,000 if you are 50 or older). Within the account one can invest in stocks, bonds, index funds, or my favorite, ETFs.

The tax advantage of the Roth comes into play when investors are ready to access their money in retirement. Once you cross 59.5, you can withdraw any gains or distributions TAX FREE!

It's important to note that before 59.5 you can withdraw any of your original contribution penalty free, just not any gains. Now yes, waiting till 60 might appear terrible. Especially if you are young.

I get it. Investing your money and not having access to its returns for decades doesn't sound too appealing. Here's how I look at it.

One, time is going to pass either way. Two, you are limited by your income (coming next) so you might as well take advantage of the Roth while you can.

And think about it, I'm sure your 60 year old self won't be mad at an extra million tax free.

Are You In?

Sadly, the Roth IRA isn't available to everyone, and it might not be available to you in the future if your income increases.

Here is what you can contribute according to how much guap you make.

Over the income limit?

There's still hope. Look into a backdoor Roth IRA. I'll save this topic for another email, but if you are curious click here for an Investopedia article to get you started.

Roth Power

To show the power of a Roth IRA, and the potential tax savings here is a quick example.

Buffett Jr. is 25 years old. He starts a Roth IRA and begins maxing it out every year.

Throughout his life, he averages an 8% annual return.

When he turns 60, his Roth will have a balance of $1,033,900. This account will also produce around $40,000 tax free in dividends each year assuming a 4% yield.

If this was in a traditional investing account how much in taxes would Buffett Jr. owe? Great question.

Upon withdrawal of his entire investment the capital gains bill would be approximately $123,585. This is assuming Buffett Jr. is happily married and together with his lover they bring in a combined annual income of $150,000 in Texas.

If you want to change these numbers around for yourself, here is a link to the Roth IRA calculator I used for this example.

Conclusion

We have no clue what tax rates will be in the future. In 36 years when I turn 60 and decide to go spend my days somewhere tropical, I want a tax free stash.

That's the main reason I invest in my Roth.

Not this time Uncle Sam.

Till next time, Cade.

Best Memes Of The Week

Enjoy this post? I'd appreciate it if you share it with friend. Thanks, you're the best.

What I liked this week:

The European Energy Crisis Explained - 10 minute video going through the in's and out's of the energy crisis.

How to build a $1,300/month side business for $19 - Thread by Justin Welsh that breaks down a simple method for making money online.

Nothing in this email is intended to serve as financial advice. Do your own research. Thanks for reading, if you have any questions, comments, suggestions, etc. about the email send me a DM on twitter. See you soon!