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As every rich person knows, paying taxes is for suckers. With a Roth IRA, you can make sure that at least for some of your money, you'll never have to pay taxes again.
I'll point you to four stocks from the Dow Jones Industrials (INDEX: ^DJI ) that I think could give you the most bang for your Roth buck. But first, let's review what Roth IRAs are and why they're an important weapon in your tax-fighting investment arsenal.
When tax deferral is not enough
Yesterday, I explained how traditional IRAs let you defer tax on your investments. But the downside is that you do eventually have to pay tax on your money.
With Roth IRAs, though, as long as you follow the rules, all your gains aren't just tax-deferred; they're tax-free -- even once you take them out to spend in retirement. At the same time, you get all the other benefits that IRAs of all kinds offer, including not having to track trades, dividends, or capital gains, as well as nearly unlimited flexibility in choosing what investments you want.
The best Dow stocks for your Roth
So what makes a stock best for a Roth IRA? Dividends and tax simplicity are important, but first and foremost, I want stocks with the best prospects for share-price appreciation, so that I'll get as much tax-free profit as I can. I think these four stocks fit the bill.
General Electric (NYSE: GE )
A few years ago, everyone hated General Electric. It had cut its dividend and had to go to Warren Buffett for expensive capital, and shares plunged more than 80% at their lows.
But GE has come a long way since then. The company has boosted its dividend four times and seen its shares triple from their lows. It's de-emphasizing its financial sector, getting back to its industrial roots and innovating in areas like alternative energy. With a 3.6% dividend, projected 12.5% long-term earnings growth, and a reasonable valuation, GE looks like it has room to run over the long haul.
Intel (Nasdaq: INTC )
Like GE, Intel has been out of favor among tech investors. The chip sector is extremely cyclical, and many believe that Intel is out of touch, relying too much on PCs and falling behind on faster-growth areas like mobile technology.
But Intel has big plans. Its acquisition of McAfee as well as the wireless division of Infineon helped boost sales by 22% in its most recent quarter, and despite shrinking PC markets, its chip sales actually jumped 17%. More importantly, though, Intel plans to introduce smartphones and tablets later this year that are powered by its chips. The move gives the chip giant huge potential for a game-changing entry into the mobile market, and shareholders should reap the gains once the new products gain traction.
Cisco (Nasdaq: CSCO )
Back in 2010, it looked like Cisco's days in the Dow might be numbered. Shrinking earnings and signs of further trouble ahead had many investors bailing out of the networking giant.
But last year, Cisco came back with a vengeance, showing that it could still compete against smaller players and use its industry-leading dominance to build on its core strengths, avoiding failed attempts to sell consumer-targeted products.
While many expect slow growth for Cisco, I think its saving grace will be dividends. As it boosts its brand-new payout -- and with a huge cash hoard, it can certainly afford to -- Cisco should draw increased interest from income-starved investors, pushing shares up.
McDonald's (NYSE: MCD )
McDonald's was the top-performing Dow stock in 2011, so it has already demonstrated its growth potential. Moreover, with a dividend yield of 2.8%, it takes care of its shareholders with good income. But can the Golden Arches keep delivering strong gains?
It certainly did in its most recent quarter. Sales and net income rose by double-digit percentages as comps grew in every geographical region the company covers. McDonald's is still seeking to expand, with plans to spend $2.9 billion to open 1,300 more stores and renovate 2,400 others. With shares having corrected somewhat this month, now might be a perfect time to get into the stock.
Don't wait another minute
To save for retirement, it's key to get started as early as you can. With the ability to convert a traditional IRA to a Roth, anyone can take advantage of the tax-free savings vehicle as part of their plan to retire rich.
But Dow stocks aren't the only smart ideas for a Roth. If you're willing to go beyond the Dow, you can find even more smart stocks that work well in Roth IRAs. You'll find several in The Motley Fool's latest special report on building a successful retirement plan. It's absolutely free, but it won't be around forever, so read it today.