Procrastinating!!!

[raqueldiva]

I need some help and advice getting my savings started. I have a healthy weekly income, I recently won $50,000 and I have $10,000 in a savings account. i'm trying to avoid getting taxed heavily but I am overwhelmed by all the options and information.
What do I do? How do I get started? Can I trust these online banks and trading companies on the internet?
If I put $3,000 in an IRA is that tax free? When can I put the next $3,000 in?
So many questions? Please help

[boosami]

Tax implications have a lot to do with how you won the money. Did you win it by betting or lottery? Has tax already been withheld from it or did you receive it pre-tax?

In 2008, if you are under 50 years old, you can contribute $5,000 total into an IRA and that income will be deducted from your income tax (e.g. you will not be taxed for that $5,000). Note you can't use this money until retirement or else you have to pay those taxes you avoided plus an additional penalty. IRAs should not be used as tax shelters, but rather a vehicle for retirement savings.

Chartered banks are FDIC insured, up to $100,000 per account owner. You have less than that, so your money is 100% safe in a bank. If the bank goes under, the government will cut you a check for the amount you had in your accounts. Make sure you ask any bank you decide to use if they are FDIC insured, but any legit bank will be. A savings account might pay 1% interest a year, while a 5-year CD might pay 4%.

Investment accounts, however, are not insured so they are more risky... The trade off is that they offer a much higher possible interest rate, as much as 5-10% or more. However, you have the potential to also lose money depending on your investment choices.

[boosami]

What you should actually do with the money should depend on what you want to accomplish with it. Here are some examples. (I'll just assume you physically get a check of the amount $50k.)

Scenerio 1: You want to purchase a home a year from now and use the $50k as a downpayment. To earn some interest with no risk until then, you lock up the money in a 1-year CD paying 3.5% interest. At the end of the term, you withdraw the $50,000 plus $1,750 in interest. You use the sum to place a downpayment on a $250,000 home, and take out a mortgage for the remaining $200,000. Now you have a home with $50,000 equity off the bat and lower monthly payments than buying it with a 100% mortgage. In the meantime, you've earned just under $2k in interest while waiting to buy the house.

Scenerio 2: You want to earn residual income each year off the prize money and don't mind some risk. You invest the full amount in a mutual fund, with 8% average return a year. You pocket the $4,000 of interest each year, about $300 a month as a supplement to your regular monthly income. Since you are only withdrawing the interest, the $50k remains invested each year.

[cptacek]

I think that the money will be considered regular old income for you, and not in some special tax category of "windfall" money?

If so, if you are not maxing your 401k at work, max that out of your paycheck and replace the money that isn't coming to you in your paycheck with the $50,000. That is $15,000/year right there. Do the same with your DH, so that's up to $30,000. Then, invest in two IRAs at $5000 each, so you have now "sheltered" $40,000 by investing it and you haven't changed your current living at all.

[Aleta]

I don't think that you pay social security and medicare taxes on winnings. I thought it was considered passive income.

[boosami]

Correct, you do not have to pay FICA tax on gambling winnings (unless you file as a professional gambler).

[disneysteve]

If the money was won through some type of gambling (casino, lottery, etc.), keep in mind that you can deduct any gambling losses against those winnings. So anything you spent for lottery tickets, church bingo, casino losses, etc. can help reduce the tax bite.