Your Best Defense Against the IRS: Facebook Inc (FB), Yelp Inc (YELP), eBay Inc (EBAY)

But the main reason why Roth accounts haven’t taken off is that you have to give up something when you choose a Roth. Regular traditional IRAs and 401(k)s give you a tax break now on your contributions, letting you reduce your taxable income by whatever you put into your retirement account. By using a Roth instead, you forego those benefits, which can cost you thousands more in current-year taxes.

Moreover, there are income limits that prevent many high income people from making Roth contributions. Yet that hasn’t stopped several smart entrepreneurs from taking full advantage of Roth IRAs to produce profits of millions of dollars. Consider:

• In 2001, PayPal CEO Peter Thiel bought 1.7 million shares of his company’s stock for $0.30 per share. When eBay Inc (NASDAQ:EBAY) bought PayPal the next year for $19 per share, Thiel stood to gain more than $30 million — all tax-free, since it was in a Roth. Moreover, according to numerous reports, Thiel also invested in Facebook Inc (NASDAQ:FB) through his Roth, potentially multiplying his previous profits as that stock soared prior to its initial public offering.
• More recently, PayPal co-founder Max Levchin used the same technique to buy shares of social-media company Yelp Inc (NYSE:YELP) , resulting in a projected $100 million profit when the company came public in early 2012.

How did they do it? Roth conversions allowed many investors to take existing money in regular IRAs and open new Roth accounts with the proceeds. Income limits applied to conversions as well, meaning that these entrepreneurs probably had to take advantage of low-income years to do conversions. But in 2010, those limits went away, giving access to everyone regardless of income.

Again, converting to a Roth isn’t free; you have to pay tax on the amount you converted. But after that upfront pain, your profits for life are nothing but gain — and your savings in retirement and beyond can be astronomical.

The article Your Best Defense Against the IRS originally appeared on Fool.com.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends eBay and Facebook. The Motley Fool owns shares of eBay and Facebook.

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