In my last write-up about the story of Mr. Hive and how he stopped paying withholding taxes to the government after every paycheck. He then invested that money in risk-free ETF or Dividend based stocks or even some in cryptocurrency.
Mr. Hive will pay Taxes on these gains because he has to pay tax returns. $7200 that he did not pay in the face of Withholding Taxes, he has to take it out from stocks. So he will have to sell those stocks and pay taxes. It depends on how many short-term or long-term trades he made.
Mr. Hive will have to pay short-term capital gain taxes because He purchased new holdings every paycheck, which will make the last 9/10 months of buyings short-term.
We saw that Mr. Hive invested that Profit of $600 the same way he did short-term trades and made a fortune of $125000.00 out of nothing. By mere change of decision to pay taxes at the end of the year.
But, we will take Mr. Hive on a different journey today. We will see if we can maximize the gains of Mr. Hive.
Me: Hey Yo! Mr. Hive.
Mr. Hive: Hey @vixmemon wazzup!
Me: Why don't you take those $600 out from your stocks and move them to a new Account?
Mr. Hive: Why would I do that? I am making profits, and you told me I can make 125000 from this in 30 years.
Me: First of all, I am not a financial advisor. Secondly, I am not Your financial advisor. Thirdly, it's your money, you don't let a random dude like me tell you what to do with your money. Lastly, those are not guaranteed. You could very well make a $250000 or $50000 based on how the market favors you!.
Mr. Hive: Oh, so you got something better for me then?
Me: Ya! Y dontcha, open up a Roth IRA Account? See, your total income before taxes and deductions seems huge, but after deductions and everything, you will have an income less than the limits of Roth IRA.
Mr. Hive: This what? that What?
Me: See, the rule is that If you are Married Filing Jointly (which you are), and your MAGI (Modified Adjusted Gross Income) is less than $140,000 (which yours is). You can open up a Roth IRA Account!.
Mr. Hive: How does that help me?
Me: Well, A Roth IRA account is Tax-Free. Whatever money you make in a Roth IRA account, will never be taxed as long as you don't take it out before retirement. If someday you realize that your MAGI is more than 140,000, your wife's account can be opened because she also is Married and Filing Jointly like you. When you deposit $600 every year in it, you have already paid taxed on that $600, and when you trade in stocks in Roth IRA, you don't have to pay taxes on Capital Gains.
Mr. Hive: Isn't that something! Let's do some calculations.
Me: That is tedious.
Me: Let's understand that, If you do not pay taxes on your Capital Gains, you will end up with more money than you would normally do with Taxes. Let's say for short-term gains, about 40% more money, and for long-term gains about 15% more money.
Mr. Hive: What if we can't open a Roth IRA due to income limits 10 years down the line?
Me: Then you can open a Traditional IRA account, and in Traditional IRA you have to pay taxes only when you withdraw money after retirement.
Mr. Hive: So how does that tax differ from the tax i am paying now?
Me: You will only withdraw an amount that is either non-taxable or has the lowest possible tax. i.e. Under $40,000/year.
Mr. Hive: Ok, well! that is a lot of information to process! Let me talk to my wife Leo and we might end up doing all this.
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