How to Cut Your Taxes by $15 Million

When you save for retirement, you have to use all the resources you have at your disposal. But the effort is well worth it, as one investor who saved himself from a potential $15 million tax bill can attest.

Below, I'll introduce you to the person who used a simple tax-favored Roth IRA account to earn what could be a $100 million tax-free windfall. But first, here's a quick refresher on the Roth IRA and why it's such a valuable tool in your struggle to retire comfortably.

What a Roth will do for you
Roth IRAs are especially valuable tools for retirement savers. Unlike traditional retirement accounts like IRAs and 401(k)s, you don't get an upfront tax deduction for money that you put into a Roth. But in return for giving up that deduction now, you get an even more valuable benefit later on: tax-free treatment for all the income you earn from your account.

In the past, I've suggested that the best way to make the most of your Roth IRA is to invest in stocks with the biggest possible growth potential. Whether you choose binary-outcome speculative biotech plays like Seattle Genetics (NAS: SGEN) and Amarin (NAS: AMRN) or simpler growth stories such as lululemon athletica (NAS: LULU) and MAKO Surgical (NAS: MAKO) , you can save a bundle in taxes if you end up picking big gainers in your Roth IRA.

This strategy gets a positive review
The investor who made better use of his Roth IRA than any other person I've seen is Max Levchin. Levchin is a well-known tech entrepreneur who has been involved in several businesses. He co-founded PayPal long before eBay (NAS: EBAY) bought the company, and subsequently founded media-sharing service Slide, which Google bought in 2010.

But the masterstroke for his Roth IRA was his role in helping to start social-network review service Yelp. The company announced its plans to go public yesterday, and buried within the filing was this detail on Levchin's 28.6 million-share ownership stake: "Consists of 15,317,779 shares held directly by Mr. Levchin and 13,258,588 shares held by PENSCO Trust Company Custodian FBO Max Levchin Roth IRA [emphasis added] for which Mr. Levchin holds voting or dispositive power."

Now Yelp hasn't given a price it expects its shares to fetch. But earlier reports suggesting Yelp would seek an overall valuation of $2 billion would put the Roth IRA's stake at roughly $128 million. With a purchase price of just over $2 per share listed elsewhere in the registration statement, Levchin could see his shares' value jump by about $100 million -- and because it's in a Roth, he'll avoid the 15% tax on that gain whenever he sells those shares, instead paying no tax on it whatsoever.

Surprisingly, this doesn't seem to be a common tactic among startups. I checked SEC filings for Groupon (NAS: GRPN) and LinkedIn (NYS: LNKD) searching for any mention of Roth IRAs but found none. Early investors are missing out on some big tax benefits by ignoring the Roth strategy.

Get what you need
Now granted, you may not have the pull to become an angel investor for the next big Silicon Valley social media start-up. But that doesn't mean you should give up on Roth IRAs entirely. Even without going through the special steps to invest in a privately held company in your retirement account, you can still use a simple Roth IRA to get some impressive tax savings. Even if you "only" save $1 million over the course of a long 40-year career, wouldn't you rather get to enjoy all of that money -- rather than having to fork over between $100,000 and $350,000 of it to Uncle Sam?

Roth IRAs and other tax-favored retirement accounts are just one type of weapon you have in putting together the right retirement investing plan. Get some more of the tips you need to make the most of your finances in our newest free special report, where we reveal The Shocking Can't-Miss Truth About Your Retirement.

At the time this article was published Fool contributor Dan Caplinger isn't anywhere near Max Levchin's retirement account balance, but he can still dream. You can follow him on Twitter here. He doesn't own shares of the stocks mentioned in this article. The Motley Fool owns shares of Google and lululemon athletica. Motley Fool newsletter services have recommended buying shares of Google, lululemon athletica, eBay, and MAKO Surgical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy saves you money.

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