Would you like to put away, say, $100,000+, to grow tax-free for life and even, potentially, the lives of your heirs? The investment vehicle is the little-used Roth IRA. "Wait", you say, "Like many business owners, my joint personal income exceeds the Roth IRA phaseout threshold, and I can't make a Roth contribution." Technically true, but there's a little-known route by which you can fund a Roth, now that conversions from a conventional IRA to a Roth are allowed (not subject to any phaseouts).
Letís step back. The Roth hasn't gotten a lot of traction, because most people who qualify are just saving enough to grab their employer 401(k) match. Roths are most useful to higher-income earners, but Congress has other plans for your income, and decided you're not eligible. Unless you're clever.
Caveat: If you already have a large conventional IRA or Rollover IRA, this strategy doesn't work for you. It may, however, work for your spouse (whether employed or not) if he or she has no IRA, or just a small one. If either is the case, read on.
It turns out that anyone, even if they're eligible for an employer plan, like a 401(k), can make after-tax contributions to an IRA. True of non-earning spouses, as well. Regardless of income. Now, after-tax IRA's are rare, because they're generally a bad idea. They have a way of making all dividends and capital gains over the years into ordinary income, and require taxable distributions at ordinary income tax rates beginning at age 70 1/2. Not pretty.
What if, however, you already had an after-tax IRA? Couldn't you convert it to a Roth? Of course, you would have to pay taxes on the value at conversion above the original cost basis (whatever you contributed after-tax). The cost basis (total after-tax contributions) is excluded because you already paid taxes on that once before.
What, then, would keep you from opening an after-tax IRA for yourself, your spouse, or both and funding it to the $5,000 maximum ($6,000 for those over 50)? Nothing. And then what would keep you from immediately converting that to a Roth? Nothing. So, if you don't have any other IRA in place, you can do this every year. In fact, you can still do it for 2012 -- right up until your tax-filing deadline. And for 2013, as well. Just get the after-tax IRA funded first, then open a Roth Conversion IRA and order the custodian to transfer the after-tax IRA assets over to the Roth Conversion IRA.
What if you do have another IRA or even multiple IRAs? If any of them are especially big, that's a problem. You can selectively convert, account by account, although you must proportionally blend pre-tax and after-tax accounts. For example, consider converting the smaller IRA(s) and leaving large IRAs alone. Under this scenario, your tax preparer will blend all your IRA assets (not your spouseís), whether converted or not, when figuring the conversion taxes. Thus, if you have a larger IRA, say $250,000 or $1 million+, you will incur a large tax bill. Not practical.
So, if this doesn't work for you, perhaps your spouse has no IRA or a very small one, say $10,000 or so. In that case, you could make the after-tax contributions to that account and then convert the whole thing. Your cost basis on the conversion would be the after-tax contributions, leaving you paying income taxes on just the pre-tax funds. You could do that right now, by contributing $6,000 after tax for 2012 and $6,000 after tax for 2013, making the total conversion $22,000, only $10,000 of which is taxable in 2013.
In the case of 2 eligible spouses, the combined account values would easily top $100,000 in 8 years or so. Tax free for your lifetimes and the lifetimes of your beneficiaries, if they so choose. Remember, no RMD's on a Roth.
As always, everyone's situation is different. Before embarking on this or any other financial strategy, check with your tax professional to be sure it's the right thing for you.