It's often said that we spend far more time planning for our summer vacations that we do preparing for our multi-decade-long vacation (aka retirement). But savvy investors know that a little bit of retirement planning now can pay off big-time later.
Let's first look at why you shouldn't wait until the eleventh hour to make your Roth IRA contribution. Then we'll examine five high-quality stocks for you to consider for your Roth.
A few basics
Roth IRAs are unique investment accounts that offer tax-free retirement income. You can buy stocks, bonds, mutual funds, and exchange-traded funds in a Roth IRA. If you qualify, you can contribute thousands of dollars to a Roth IRA every year for the rest of your working life.
Even if you fully contribute to your retirement plan at work (a huge high five 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 may be right for you.
You still have a few months until the April tax-filing deadline to make your contribution for 2012, but plunking down money into your Roth early pays off. In fact, missing out on tax-free growth and several months of earnings compounded over the next 20 or 30 years can make a huge difference.
Supercharge your Roth
Here are a few great companies to consider. All have enjoyed strong growth over the past several years and possess robust prospects in emerging economies or industries. If you owned these stocks in a Roth IRA, you would have enjoyed significant tax savings.
|
Company |
$5,000 Invested 3 Years Ago Would Be Worth... |
Tax Savings if Invested in a Roth IRA |
|---|---|---|
|
Diageo (DEO 0.06%) |
$8,531 |
$530 |
|
Rackspace Hosting (RAX +0.00%) |
$18,482 |
$2,069 |
|
Apple (AAPL +1.20%) |
$12,763 |
$1,164 |
Source: Yahoo! Finance data as of Jan. 23, 2013. Tax savings compared to paying 15% long-term capital gains tax.
The world's largest liquor company by revenue, Diageo sees developing markets as a key driver for growth. The No. 1 international spirits company in Africa, Asia, and Latin America, Diageo receives one-third of its net sales from these markets -- up from 22% in 2005. These markets are expected to yield half of Diageo's net sales by 2015.
Rackspace Hosting's cloud-computing technology business focuses on delivering a customized client experience. Rackspace saw year-over-year quarterly revenue growth of 27% and earnings growth of 36%. Cloud computing services are projected to comprise one-third of worldwide IT spending this year. Rackspace's five-year expected earnings growth rate is 31% per year, signaling an impressive outlook for the company.
Despite Apple's earnings miss, money pros like hedge fund manager David Einhorn still remain optimistic about the company. Its iPhone makes up a huge slice of Apple's revenues and profitability, and the company continues to command the highest sales per square foot of any retailer on the planet . With the stock's 34% retreat since mid-September, it's high time to consider adding this stock to your retirement account.
Owning these stocks in a Roth IRA potentially saves you from a big tax bite. Of course, that's if these stocks live up to their lofty growth expectations.
Other ideas for your Roth
If growth stocks aren't for you, that's quite all right. Dividend-paying stocks or more diversified investments, like mutual funds, are also great investments for Roth IRAs.
When dividend-paying stocks are owned outside of a Roth IRA, the dividends are considered income and taxable. By holding dividend-paying stocks within a Roth, you get the tax-free advantage. As a bonus, by reinvesting dividends, you buy more shares every time the company pays its dividend.
Look for companies that pay strong dividends and boast solid track records of increasing dividends for decades. Also, favor companies that have sustainable payout ratios, which is the percentage of earnings a firm pays to its shareholders in dividends. For instance, consider blue chip bellwethers Illinois Tool Works (ITW 0.47%) and Coca-Cola (NYSE: KO), which pay 2.4% and 2.7% dividend yields, respectively. Both companies boast suitable payout ratios and have increased their dividends for roughly 50 consecutive years.
Or consider mutual funds. Capital gains distributions from mutual funds are passed along to mutual fund shareholders each year and are taxed. But by owning mutual funds inside a Roth, you avoid the capital gains taxes altogether.
Start the year off right
Regardless of which style of investing is right for you, consider a Roth IRA. By taking action today, you can save yourself money over the long haul. Not to mention headaches as tax time nears.
