Tax-Differed Annuity, 100k at 19

[jimmyfingers]

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I thought you can't put poker money into a Roth IRA.

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No WTF?

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actually he's right, money won from poker has a purple tint and has ronald mcdonald's picture instead of a president (if you look closely)

[jively]

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I'm pretty sure annuities have high mark-up.

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That's the problem with them. An annuity is only tax deferred because the government treats it as "insurance", so every annuity comes with some sort of insurance component, which I doubt OP needs. Plus their is the insurance companies fees, and commissions to the broker who sells you the annuity, which are considerable.

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The insurance aspect is generally something like this: If you buy it for $100,000, and it is invested in the stock market and goes down, when you die, your beneficiary will get at least $100,000. Some also offer a "high-water mark" where if it goes up to $105,000 one year, then it goes down and you die, your beneficiary will get $105,000. This benefit is not worth paying for if you are 19, have a very long life expectancy, and use diversified portfolios.

There are no-load annuities where no broker earns a commission. Vanguard has a very good low-cost one.

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There appears to be types of annuities. The ones that hold your money and pay you a nice stream of payments until you die, and those that accumulate tax deferred and are used as quasi-retirement funds. Since OP's dad used the magic term "tax deferred" I'm guessing he meant the latter.

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Correct; one that pays monthly is called "annuitized" and one that doesn't is called "deferred." [Annuitization is helpful for older retired people who want a guaranteed stream of income for life and do not wish to leave anything to any beneficiaries.]

The rest of DesertCat's post was good. Even with a low-cost no-load variable annuity, you really don't want it. Using a low-turnover portfolio of index funds is very tax efficient, and gains will be deferred, and then taxed at long-term capital gain rates (now 15%). Gains on deferred annuities are taxed at ordinary income rates (up to 35%).

Deferred annuities are not really for old people, but they are for high-income investors who have already maxed out other retirement vehicles. And then they are only really good when ordinary income and long-term capital gain tax rates are the same, which has not been the case for many years. As a financial advisor, I basically would not recommend a variable annuity for anybody, especially a 19-year old.

-Tom

P.S. With Democrats in power, the 15% capital gain rate may go away...

[jively]

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I thought you can't put poker money into a Roth IRA.

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No WTF?

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Gambling income is not earned income. You need earned income in order to qualify for a Roth IRA or traditional IRA.

-Tom

[thejerkface]

I was unaware that you couldn't use gambling income to fund a Roth IRA. I recently put 4k into a Roth IRA. I'm in college and have no other source of income except poker. What should I do? Will I be heavily penalized?

[prohornblower]

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I was unaware that you couldn't use gambling income to fund a Roth IRA. I recently put 4k into a Roth IRA. I'm in college and have no other source of income except poker. What should I do? Will I be heavily penalized?

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Depends. Can you hurry up and get a job and make 4K by the end of the year? lol.

[maxtower]

Yeah you'll need to actually earn 4k as far as I know. Of course you could always just tell the IRS you made $4000 from mowing grass all summer and report it as earned income. They could have paid you through neteller right?

[lala]

why not file as pro and then you can open an IRA.

[jively]

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I was unaware that you couldn't use gambling income to fund a Roth IRA. I recently put 4k into a Roth IRA. I'm in college and have no other source of income except poker. What should I do? Will I be heavily penalized?

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You can withdraw the excess contributions (which would be the whole amount), and if you do it this year there should be no penalty: link

Contact your Roth IRA custodian (Vanguard, Ameritrade, etc.) to ask them how to do it.

-Tom

[NajdorfDefense]

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Oh, also not to be nitty, but it's "tax dEferred", meaning you pay taxes on it LATER.

I don't know why you'd want to defer taxes when you've got the capital now, and you have a good 40 years of growth potential. That is why a RothIRA is good. That is "post-taxed" money you are investing.

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Not to be nitty, but paying taxes now and investing at 10% compounded = not paying taxes now, investing at 10% compounded, and paying taxes at finish, mathematically speaking.

This of course assumes similar tax rates. Since we have no knowledge of rates 40 years from now, that is normally a good assumption.

[prohornblower]

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Oh, also not to be nitty, but it's "tax dEferred", meaning you pay taxes on it LATER.

I don't know why you'd want to defer taxes when you've got the capital now, and you have a good 40 years of growth potential. That is why a RothIRA is good. That is "post-taxed" money you are investing.

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Not to be nitty, but paying taxes now and investing at 10% compounded = not paying taxes now, investing at 10% compounded, and paying taxes at finish, mathematically speaking.

This of course assumes similar tax rates. Since we have no knowledge of rates 40 years from now, that is normally a good assumption.

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But because he knows he has the capital NOW, just go ahead and pay taxes now. Get it out of the way when you know you have it/don't need it.