Tax Magic: How To Turn Taxable Income Into Tax-Free Income

Believe it or not, there are ways to convert taxable income into non-taxable income, without any fear of an IRS audit.

Here's one of my favorites. It's been part of our tax code for over 30 years, yet many still don't take advantage of it.

What am I talking about?

The IRA -- Individual Retirement Account.

Now, before you say, "Oh, I know all about that one; what's so great about an IRA?", give me 10 minutes to explain 3 new benefits to the IRA rules that you may not realize.

BENEFIT #1: How To Avoid Tax Rather Than Postpone Tax

First, did you know that there are now 2 kinds of IRA's available?

The so-called Traditional IRA is the one that first came out way back in the 1970's.

But there's a newer version of the IRA that's only a few years old -- it's called the Roth IRA. And the difference between these 2 IRA's is huge.

Traditional IRA contributions are tax-deductible, resulting in immediate tax savings. The growth of those contributions is also tax-sheltered while the funds remain in the account.

But eventually all tax-deductible Traditional IRA contributions, as well as the growth of those contributions, will be subject to income tax when the money is withdrawn from the account.

In other words, Traditional IRA's offer the opportunity to temporarily postpone taxes.

In contrast, the Roth IRA offers the opportunity to permanently avoid taxes. With a Roth IRA, you don't take a deduction for your contributions; instead, you make a contribution with "after-tax" dollars.

Whatever you put in not only grows tax-free, but can also be withdrawn tax-free.

Here's an example to illustrate:

If you invest $2,000 per year for 20 years into a Roth IRA, you will have invested a total of $40,000. Now if that Roth IRA earns an average of 10% per year, that $40,000 will grow into $126,005.

Now comes the fun part: Assuming the IRA has existed for at least 5 years and you are at least 59