Big,Tax,Loophole,Just,Got,Bigg finance, share, loan A Big Tax Loophole Just Got Bigger

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Believe it or not, there are ways to convert taxable incomeinto non-taxable income, without any fear of an IRS audit.Here's one of my favorites. It's been part of our belovedtax code for over 30 years, yet many still don't takeadvantage of it.What am I talking about?The IRA -- Individual Retirement Account.Now, before you say, "Oh, I know all about that one; what'sso great about an IRA?", give me 10 minutes to explain 3 newbenefits to the IRA rules that you may not realize.BENEFIT #1: How To Avoid Tax Rather Than Postpone TaxFirst, did you know that there are now 2 kinds of IRA'savailable?The so-called "Traditional IRA" is the one that first cameout way back in the 1970's. But there's a newer incarnation of the IRA that's only a fewyears old -- it's called the "Roth IRA".What's the difference between a Traditional IRA and a RothIRA? There's a HUGE difference! "Traditional" IRA contributions are tax-deductible, and thegrowth of those contributions is also "tax-sheltered" whilethe funds remain in the account.But eventually all tax-deductible "Traditional" IRAcontributions, as well as the growth of those contributions,will be subject to income tax when the money is withdrawnfrom the account.In other words, Traditional IRA's offer the opportunity toPOSTPONE taxes. Traditional IRA's enable you to save taxes--- but these tax savings are only TEMPORARY!This is the big difference between Traditional IRA's andRoth IRA's: Traditional IRA's allow you to temporarilyPOSTPONE taxes. The Roth IRA offers the opportunity topermanently AVOID taxes.With a Roth IRA, you don't take a deduction for yourcontributions; instead, you make a contribution with "after-tax" dollars.But whatever you put in not only grows tax-free, but canalso be withdrawn tax-free.Here's an example to illustrate:If you invest $2,000 per year for 20 years into a Roth IRA,you will have invested a total of $40,000.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 RothIRA earns an average of 10% per year, that $40,000 willgrow into $126,005.Now comes the fun part: Assuming the IRA has existed for atleast 5 years and you are at least 59 ½ years old, you canwithdraw the entire $126,005 TAX-FREE!In contrast, if this money had been invested in aTraditional IRA, the entire $126,005 would be subject toincome tax as it is withdrawn.The $86,005 of growth is magically converted from taxableincome to non-taxable income. Assuming you are in the 15%federal tax bracket, that's a savings of $12,901. Add anystate income tax, and you could save well over $15,000 intaxes.And $15,000 buys a lot of pizza in my house!BENEFIT #2: Take An Extra 3 ½ Months To Fund Your IRAThe deadline for contributing to your IRA is April 15 of theyear AFTER the year for which the contribution made. (Boy,I'm starting to sound like a lawyer now, aren't I?)In other words, for Year 2002, you have until April 15, 2003to put money into your IRA. If you've already invested the maximum (more about that in amoment) by December 31, 2002, then you're done. No moremoney can go into the IRA for 2002.But when January 1 rolls around, if you haven't mixed outyour IRA, you have until April 15 to do so.Which brings me to . . .BENEFIT #3: The Maximum Contribution Amounts Have IncreasedFor many years, the most you could put into an IRA was$2,000. Now, the maximum is $3,000 (assuming you have atleast that much earned income from wages or self-employmentincome).And if you are over 49, you can put in another $500,bringing the total maximum to $3,500.A married couple, both age 50 or older, can put a whopping$7,000 per year into a Roth IRA. Not too shabby, eh?One final note about these Roth IRA rules: For marriedpeople, you can only contribute the maximum of $3,000 or$3,500 if your combined income is less than $150,000.If you are single or head of household, you can contributethe maximum if your income is less than $95,000.(I hate rules like that, don't you!)For most middle-class folks looking for a perfectly legalway to permanently avoid tax (rather then merely temporarilypostpone tax), the Roth IRA fits the bill!Now comes the hard part -- how to actually implement thistax avoidance strategy. "Wayne", you say, "I'm getting close to retirement and so mywife and I are trying to save as much as we can for ourgolden years. But $7,000 a year? It's hard to put asidethat kind of money. We need every dollar we make just topay the bills."If that's your situation, I'm not going to get up on my"what-do-you-mean-you-can't-save-any-money-for-retirement"soapbox and start preaching at you.I will say this: You've got to start somewhere, and you'vegot to start saving something -- right now!Don't put off saving for retirement. The longer you wait,the harder it gets to get started.People who have a problem saving for retirement usually havea budgeting problem. And budgeting is beyond the scope ofthis article. For an excellent resource on budgeting, I highly recommendthe Budget Stretcher web site: http://www.homemoneyhelp.com.This site offers a free budget system complete with simpleforms and worksheets to help you figure out how to put somemoney aside for a Roth IRA or other savings plan.Take advantage of this free resource!