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1 Big Reason You Need a Roth IRA

By Nicole Seghetti - Apr 9, 2013 at 4:45PM

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Wave good-bye to taxes... forever.

A Roth IRA is the most essential piece of your retirement savings strategy. And with just days remaining until the April 15 funding deadline, you're running out of time to take advantage. Let's look at the biggest reason you need to make your contribution. Then we'll uncover three stocks to consider for your contribution dollars.

Why the Roth is right
A Roth IRA lets you make contributions with after-tax dollars in exchange for tax-free income in retirement. Here's just how powerful tax-free growth is: Every single dollar you earn in a Roth IRA is a dollar that Uncle Sam will never touch. And when you diligently contribute money to a Roth IRA every year, you harness even more potential to compound that goodness.

If you aren't already up to speed on the eligibility rules and contribution limits, quickly review the Roth rules. Then hop back over here for three solid stock ideas.

Stock up your Roth IRA
Roth IRAs work their hardest for you when you have great stocks in your Roth IRA portfolio. I've found three companies that boast exciting growth prospects and competitive positions in their respective industries. And, as we'll see in a bit, owning these stocks in a Roth IRA grants you enormous potential to save a bundle on taxes.

eBay (EBAY 1.99%)With its strong consumer and merchant relationships, PayPal is the most valuable piece of eBay's payments business and is establishing itself as a leader in online payments. As the company transitions to point-of-sale solutions for brick-and-mortar stores, eBay will likely benefit as traditional retailers seek refuge from the growing online threat. eBay has also enjoyed robust growth in its Marketplaces business, which will likely continue with the increased use of mobile devices.

Now to the power of a Roth IRA: If you'd invested $5,000 in eBay stock a decade ago, it'd be worth $12,435 today. However, had you done so within a Roth IRA, you wouldn't need to pay a penny of the $7,435 gain to Uncle Sam. That's a tax savings of $1,115, assuming a 15% maximum capital gains rate.

Chipotle Mexican Grill (CMG -0.33%)With its unwavering focus on quality and local food sourcing, Chipotle has exhibited fiery growth during the past several years. Nearly every Chipotle restaurant is located in the U.S., representing a huge opportunity for international expansion. Even though its higher prices and more selective menu limit its customer base, this hasn't posed a problem for the burrito maker. Consumers crave even more. Chipotle is answering by rolling out a catering service and new restaurant concepts.

Had an investor plunked down $5,000 in Chipotle stock within a Roth IRA on the stock's January 2006 IPO date, that individual would have saved $4,840 in taxes based on a 15% capital gains rate.

Qualcomm (QCOM 0.40%)Next-generation mobile networks are based on a technology developed by Qualcomm. By holding the patents on this technology, the company collects royalties from smartphone and tablet makers, like Apple, who use it. And Apple's adoption of Qualcomm chips in its iPhone has helped the company jump in the chip sales rankings and represents a growth driver for Qualcomm. Qualcomm provides shareholders a unique opportunity to invest in the entire mobile trend without having to bank on one particular device manufacturer.

The benefit of owning Qualcomm stock in a Roth IRA means that you could've avoided nearly $2,700 in taxes on a $5,000 investment made a decade ago, again assuming 15% tax rates on capital gains.

Of course, no one can predict how these stocks will fare in the coming years. But if they live up to their lofty growth potential, these stocks can help you avoid paying a lot of money to Uncle Sam.

Foolish bottom line
Time is running out, so don't let this important deadline slide past you. Make the time to fund your Roth IRA today. By doing so, you'll be one step closer to safeguarding your financial future.

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Stocks Mentioned

Chipotle Mexican Grill, Inc. Stock Quote
Chipotle Mexican Grill, Inc.
CMG
$1,289.79 (-0.33%) $-4.32
QUALCOMM Incorporated Stock Quote
QUALCOMM Incorporated
QCOM
$132.12 (0.40%) $0.52
eBay Inc. Stock Quote
eBay Inc.
EBAY
$45.19 (1.99%) $0.88

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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