Nobody likes to pay taxes. Luckily, Congress has given you a way to avoid paying taxes for the rest of your life — and it’s perfectly legal.
Before you decide that a lifetime ticket to tax-free profits is too good to be true, let me point out one thing: There is a catch. Yet even though you have to give up something now in order to gain access to this completely legitimate tax-avoidance mechanism, the payoff down the road could make what you pay now look inconsequential by comparison. Let’s take a closer look at this strategy to see how it can work for you.
Say sayonara to the IRS
In order to give you the latest information on this money-saving financial planning technique, I turned to the experts at the Fool’s Motley Fool ONE Tax Center. Providing your email address will get you a free copy of our recently released guide on cutting your taxes in 2013 and beyond, letting you read for yourself about how Roth accounts can be your best defense against the IRS and the changing whims of lawmakers and the tax code.
Roth accounts come in two flavors, one for IRA investors and the other for workers who have Roth options in their 401(k) plans. But both Roth accounts share one key benefit in common: Once you contribute to a Roth, as long as you meet its guidelines, the income that you generate inside the Roth is entirely free of tax. Even when you withdraw money from your Roth account after you retire, you still don’t have to pay tax on the proceeds — and if your heirs are fortunate enough to receive inherited Roth proceeds, they won’t have to pay taxes either when they’re required to make withdrawals.
So why don’t more people take advantage of Roth accounts? One reason is that contribution limits are relatively low — $5,500 this year for a Roth IRA, with an extra $1,000 if you’re 50 or older. Roth 401(k) accounts have higher limits of $17,500 for everyone plus $5,500 for those age 50 or over, but Roth 401(k)s are relatively new, and so not every employee has access to such an account even if their employer offers a regular 401(k).