When Susan Polgar and I first began working on our book, I asked her what was one of the biggest financial problems that chess professionals have. She told me that the volatile nature of the income stream for someone playing tournament chess, teaching chess, or coaching the game makes it difficult to plan for retirement.
If you are a professional chess player or coach, you understand the situation.
And, even if you’re not a chess professional, but get paid on commission or have an irregular income stream, you can certainly relate to the points below.
(Make sure to read the bottom of this article under the heading, “One critical fact about finances that chess professionals need to know.” That paragraph gives you the opportunity to find out something specifically that relates to your situation.)
If you are in the world of chess, you probably need an IRA
An IRA is an “individual retirement account.” As the government wants to encourage people to save for retirement, it allows you to put some money aside to grow on a tax-free or tax-deferred basis. There are two main types of IRAs, each with its pros and cons, but let’s take a minute to clarify why you need one.
Unlike your parents or grandparents, who might’ve worked for a big corporation that guaranteed them a fixed pension when they retired, you’re probably on your own. You earn your money either by winning prizes at tournaments, teaching students, or coaching teams. When you stop working, no one is going to send you a monthly check, except perhaps Social Security, which frankly is not much money.
You could and probably should put aside money every month into some kind of savings plan or mutual fund. But it’s also a great idea to take advantage of the tax-free growth an IRA provides.
In chess terms, the strategy that you should be following is like an opening game where you protect your strongest piece, the King, by castling, in order to use it later. Likewise, you need to protect your core assets, your retirement savings, from the ravages of taxes. The tactics that you should follow include small but steady deposits into an IRA account and careful investing.
Why is tax-free an advantage?
Many online calculators allow you to compare the growth of a taxable investment with a tax-deferred investment. A realistic example might look something like this:
If you invested $10,000 and averaged 6% per year over 20 years…
- If your marginal tax bracket was 25% you would end up with about $24,000 at the end of the period.
- If that investment was held in a tax-deferred account, your portfolio would top $31,000.
Tax-deferred savings means “more money in your pocket.” Though you ultimately must pay taxes, the longer you can delay that bill, the better.
Two types of IRAs – Traditional and Roth
The IRS limits the amount that you are allowed to put into an IRA. For both a traditional IRA and a Roth IRA, the number is the same. As of 2014, you’re allowed to put $5500 into an IRA (or $6500 if you are aged 50 or older).
Traditional IRA: When you put money into a traditional IRA, you get a current tax deduction on the amount of money that you deposit. When you take the money out, however, you will have to pay tax on the withdrawals.
Roth IRA: On the other hand, money that you put into a Roth IRA is not deductible today, but when you take it out, you will generally not need to pay tax.
How to choose whether to use a traditional or Roth IRA
It’s impossible to know exactly which choice is better, but use this rule of thumb to prepare for a conversation with a tax advisor:
- If you are in a very low tax bracket now, it probably pays to have a Roth IRA because you’re not able to benefit from the current tax deduction of a traditional IRA.
- If you are in a high tax bracket today, and if you expect to be in a lower tax bracket when you retire, use the traditional IRA in order to benefit from the current tax deduction.
There are a number of other conditions related to IRAs, so be sure to check with your accountant to make sure you’re allowed to put money into an IRA and to calculate which is a better type of IRA for you. (This article is general in nature and meant to be educational and is not giving specific tax or investment advice.)
One critical fact about finances that chess professionals need to know
Having now written a book with Susan Polgar about how the strategies of chess can be applied to investing, I have gotten many inquiries from chess players regarding their specific concerns. I intend to produce more material that is specifically designed for professional chess players and other individuals with variable income streams. I’d like to make sure that it is exactly what you’re looking for. So please send me an e-mail with the one thing that you are most concerned about regarding your finances. Send your e-mail to doug@RichAsAKing.com.