Peanut butter and jelly; thunder and lightning; IRAs and Obamacare. Three somewhat unrelated pairings, yet perfect complements to one another, as I'll demonstrate.
October is perhaps an inauspicious time to be talking about individual retirement accounts, but we're basically at the halfway point of fiscal 2013 when it comes to making a contribution to your IRA -- the cutoff date being April 15, 2014. Have you maxed out your contribution yet, or have you been twiddling your thumbs on the sidelines?
Have you contributed?
IRAs are one of the truly few and great tools the individual long-term investor has to use the power of compounding gains and dividends to their advantage. History has proved time and again that letting your winners ride and feeding off dividends are a solid path to long-term outperformance and a comfortable retirement.
There are two types of unique IRAs for investors to choose from: traditional IRAs and Roth IRAs. Technically, you don't have to choose at all and can actually contribute to both as long as you don't surpass the annual contribution limit, which is capped at $5,500 in 2013 -- which is also the first time the IRA contribution limit has been increased since 2008.
A traditional IRA allows investors to deduct up to $5,500 on their taxes annually (depending on their adjusted gross income); however, all long-term gains will eventually be taxable once withdrawals begin after age 59 1/2. By contrast, a Roth IRA gives investors no upfront tax benefits; however, all stock gains remain exempt from taxation thereafter on any withdrawals after age 59 1/2.
The two caveats to either IRA: All non-qualifying withdrawals before age 59 1/2 will result in a 10% penalty, so it's often best to let your money compound in good long-term businesses than to attempt to take the money and run, and contribution limits depend on income -- higher-income earners often have little or zero contribution capability, so it's always best to check what's best for your situation.
Obamacare and IRAs: two peas in a pod
Now that you have a better understanding of your IRA choices and how they can affect your tax situation in the near term and long term, let's have a look at a few ways the recent health-reform law known as Obamacare – officially the Patient Protection and Affordable Care Act -- can be beneficial to those looking to contribute to their IRA.
Simply put, I believe Obamacare and IRAs have an opportunity to be as complementary as bacon is to eggs. With the individual mandate being fully implemented this upcoming January, and Medicaid expanding to millions of new lower-income individuals and families, a number of incredible opportunities are opening up for investors to benefit over the long run. Here are three companies to consider for your IRA to take advantage of this health-care industry shift:
Why Xerox? Because Xerox is involved in everything from processing Medicaid claims for the entire state of California, to collecting electronic-health record reimbursements for individual states, and even the design of Nevada's state-run health exchange. Considering that California is expanding its Medicaid program to include up to 1.4 million newly insured people, Xerox could be primed to see its IT-processing and service demand shoot through the roof.
Xerox is also much more than just Obamacare. It recently signed a five-year, $100 million deal with the Texas Department of Transportation to provide toll processing and invoicing. Xerox has moved well beyond its printing roots of just 10 years ago. Whether or not Obamacare is even a success, its IT-services business, along with its 2.2% dividend yield, could provide all the spark long-term investors are looking for.
Initially, I thought insurers were getting the short end of the stick when Obamacare was unveiled because of the medical-loss ratio cap of 80%. However, insurers such as WellPoint, the company behind Blue Cross Blue Shield, look poised to benefit in a big way regardless of whether Obamacare lives up to expectations.
Under Obamacare, WellPoint is poised to gain a significant number of new government-sponsored members with its agreement to purchase Amerigroup last year for $4.5 billion. Although Medicaid patients don't come with the best margins, their sheer growth in numbers will add noticeably to WellPoint's bottom line.
But even if Obamacare proved to be unsuccessful or were repealed, WellPoint should still be among the leaders in pricing power and margins. As one of the larger insurers in the industry and with a focus on small businesses, WellPoint is able to utilize its premium pricing power better than nearly all of its competitors. That's also the reason WellPoint boasts a respectable 1.7% yield, which is more than I can say for some of its peers.
Finally, what better way to take advantage of more doctor visits and prescriptions than with a drugstore/pharmacy company like Walgreen!
Walgreen is already one of Obamacare's top promoters, teaming up with WellPoint to put out LearnAboutReform.com, a website dedicated to educating the public about Obamacare. The assumption would be that as health insurance coverage expands, more people who wouldn't have gone to the doctor will get preventative checkups and prescriptions. Walgreen's pharmacy business is what drives loyal consumers, so Obamacare could be a gigantic growth boost for the company.
However, like Xerox and WellPoint before it, Walgreen would also be just fine sans Obamacare. Walgreen's $6.7 billion, 45% stake in Alliance Boots gives it European and rapidly growing Asia-Pacific exposure, and Walgreen was already in line to benefit from a rapidly aging baby boomer population whether or not Obamacare was enacted. Tack on a 38-year streak of dividend increases and a 2.3% yield, and you have a very intriguing IRA candidate.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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