Tax season is long past, but if you were smart, you made an IRA contribution, both to start saving for retirement as well as give yourself a tax break.

But now that you have your account open -- or if you're thinking about creating a new account for the 2009 tax year --  you'll need to decide how to invest your cash. Here are a few tips for picking the best stocks for your new IRA.

Keep taxes in mind
If you want immediate tax savings, a traditional IRA is the right move for you, since it allows many taxpayers to take a tax deduction right now. In picking stocks for a traditional IRA, the most important thing to consider is that you won't have to pay tax on any income or capital gains until you start taking money out of your account when you retire.

In contrast, if you own a stock in a taxable account, you have to pay tax on your dividend income as you earn it. You can defer capital gains, however, as long as you hold on to your shares.

So, to take maximum advantage of your traditional IRA, use it to buy stocks that pay the highest dividends. The following chart shows examples of how much you'll save every year if you invest $50,000 in a number of different stocks.


Current Dividend Yield

Annual Tax Savings




Merck (NYSE:MRK)



PepsiCo (NYSE:PEP)



PotashCorp (NYSE:POT)






Assumes 15% maximum rate on qualified dividends.

As you can see, the higher the dividend, the greater the savings from owning your shares in an IRA. Furthermore, shares of real estate investment trusts (REITs) such as Vornado Realty (NYSE:VNO) often have dividends that don't fully qualify for low tax rates, so you save even more by having them in an IRA. The same is true for fixed-income securities, such as bonds.

How a Roth IRA changes things
On the other hand, if cutting your taxes right now isn't your primary consideration, a Roth IRA can be a better long-term bet. That's because rather than simply deferring your taxes until you take money out of your account, a Roth IRA lets you enjoy that growth tax-free.

That's a huge advantage over traditional IRAs, especially for growth stocks. In a traditional IRA, high-growth stocks such as Intuitive Surgical (NASDAQ:ISRG) might make your account balance go up faster, but you'll pay tax at your ordinary rate when you retire and take out the money. You won't qualify for lower capital-gains rates, even if you hold those shares for years.

With a Roth IRA, though, you'll never pay tax on income, whether it comes from dividends or capital gains. That gives Roth IRA owners a bit more flexibility in structuring their retirement portfolios.

Regardless of whether you pick a traditional or Roth IRA, make sure you don't miss out on making an IRA contribution for 2009. What you'll save is too good to pass up.

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This article was originally published on April 4, 2008. It has been updated by Dan Caplinger, who doesn't own shares of the companies discussed in this article. Intuitive Surgical is a Motley Fool Rule Breakers recommendation. PepsiCo is a Motley Fool Income Investor pick. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy gives you our best.