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Summertime is great for road trips. But while people spend a lot of time planning their week of freedom in the summer, often far less time is spent planning for their multidecade-long vacation -- retirement.
Let's look at why you shouldn't set your Roth IRA on cruise control this summer. Then we'll examine five high-quality stocks for you to consider for your Roth.
Roth IRA 101
Roth IRAs are unique investment vehicles that offer tax-free retirement income. You can invest in stocks, bonds, mutual funds, or exchange-traded funds in a Roth IRA. So why not rev your Roth with high-growth investments to get even more tax-free bang for your buck?
Even though you have nine months until the April tax filing deadline to make your contribution, plunking down some of your summer road trip money into your Roth pays off. Missing out on tax-free growth and months of earnings compounded over the next 20 or 30 years can make a big difference. If you can't make the full contribution now, consider dollar-cost averaging.
Who, me? Yes, you.
Even if you already max out your 401(k), 403(b), or 457 plan at work (and a fist bump if you do), you can still open and fund a Roth IRA. Also, if you think you might be in a higher tax bracket when you retire, a Roth IRA may be right for you.
Rev your Roth engine
Here are a few great companies to consider for your Roth. All have enjoyed amazing growth over the past several years and have strong prospects in emerging industries. Significant tax savings would have been seen if these stocks had been owned in a Roth IRA.
$5,000 Invested 3 Years Ago Would Be Worth
Tax Savings if Invested in Roth IRA
|Westport Innovations (Nasdaq: WPRT )||$20,946||$2,391|
|Chipotle Mexican Grill (NYSE: CMG )||$18,482||$2,022|
|Rackspace Hosting (NYSE: RAX )||$15,773||$1,616|
Source: Yahoo! Finance. Tax savings compared to taxpayer paying maximum 15% rate on long-term capital gains.
With natural gas at its cheapest level in decades and U.S. inventories near record high levels, Westport Innovations converts diesel engines to be able to run on natural gas and alternative fuels. It enjoyed year-over-year quarterly revenue growth of more than 132%. Westport appears slated for even more stellar growth; its five-year expected earnings growth rate is 30% per year.
Despite Chipotle's recent comments regarding higher input costs and a slowdown in store traffic, it posted some spicy second-quarter results. Chipotle saw year-over-year quarterly revenue growth of more than 21%, 61% growth in profit, and an 8% boost in same-store sales. Its five-year expected earnings growth rate is 22% per year. With Chipotle stock's recent 21% retreat, I think it's time to consider this fiery growth stock.
Rackspace Hosting's cloud computing technology business focuses on open-source coding and intense client relationships. Rackspace saw year-over-year quarterly revenue growth of 31% and profit growth of 67%. Rackspace's five-year expected earnings growth rate is 36% per year signaling an impressive outlook for the company.
Owning these stocks in a Roth IRA saves us from a major tax bite if these stocks live up to their lofty growth expectations.
Other ideas for your Roth
If revving your Roth isn't for you, that's quite all right. Stocks that travel in slower lanes or mutual funds are great investments for Roth IRAs as well.
When dividend-paying stocks are owned outside of a Roth IRA, the dividends are considered ordinary income and taxable. By holding dividend-paying stocks within a Roth, you get the tax-free advantage. As an added bonus, by reinvesting dividends, you buy more shares each time the company pays its dividend.
Look for companies that pay strong dividends, have sustainable payout ratios, and boast solid track records of paying dividends for many uninterrupted years. Consider blue chip bellwethers Coca-Cola (NYSE: KO ) and Johnson & Johnson (NYSE: JNJ ) , each of which pays 2.6% and 3.5% dividend yields, respectively. Both boast suitable payout ratios and have increased their dividends for 50 consecutive years or more.
Or consider mutual funds. Capital gains distributions from mutual funds are passed along to mutual fund shareholders each year and are taxed. The benefit of owning mutual funds inside of a Roth IRA is that you avoid the capital gains taxes altogether.
Regardless of which style of investing is for you, it's possible to sip that summertime sangria while sizing up your portfolio. Don't wait until you're knee-deep in 1099s to consider a Roth IRA and these stocks today. In fact, doing so now carries serious savings for you, the savvy investor.
We Foolish investors know that the road to retirement can be full of twists and turns, so we'd like to help you navigate the road. Position yourself for retirement with companies worthy of your hard-earned dough including three stocks our analysts believe will help you retire rich. Check them out in a free report here.