The Best Way to Invest $5,000 Today

It's not enough to find truly great stocks. To make the most from your investing prowess, you also have to know where to put those stocks once you find them. Otherwise, you could end up losing a big portion of your gains unnecessarily.

Many have found that owning high-performance stocks over the long haul was their key to open the door to substantial wealth. Some stocks, such as PotashCorp (NYSE:POT) and Hansen Natural (NASDAQ:HANS), make explosive moves upward over relatively short periods of five or 10 years. Others, though, such as Johnson & Johnson (NYSE:JNJ) and Procter & Gamble (NYSE:PG), take longer, but build inexorably year after year, rarely blowing the market out of the water, but gradually putting together an impressive track record.

Splitting your wealth
Over time, those track records add up. Just take a look at how much money you could have accumulated with those stocks and others like them:

Source: Yahoo! Finance.

But that only tells part of the story. The true measure of investing success isn't how much money your account is worth on paper; it's how much you take home when you sell and use the money, after you pay commissions, taxes, and other investment costs. And as you can see below, that's where using a Roth IRA to hold your stocks can make a huge difference.

Note: Assumes 15% maximum rate on long-term gains, and 35% rate applies to ordinary income and traditional IRA distributions.

If you're not using a Roth IRA to invest up to its current maximum of $5,000 per year -- $6,000 for those 50 or older -- then you should remedy that situation quickly. Your portfolio's depending on it.

Image source: Getty Images.

Why the Roth rules
There are a number of reasons why a Roth IRA is one of the most powerful tools you can use to save, both for retirement as well as for a number of other financial goals. Here are just a few:

• A great tax break. As you can see from the example above, a Roth IRA can save you thousands of dollars in taxes throughout your lifetime -- all for the price of using after-tax dollars to fund your contributions.
• More flexibility. Unlike some other savings methods, such as 401(k) plans, you retain full control of the investment you choose in a Roth IRA. You can pick from stocks, bonds, mutual funds, and a variety of other eligible investments.
• More access. When it comes to getting at your money, the rules for Roth IRAs aren't as restrictive as for other types of IRAs and 401(k) accounts. Once you meet some simple requirements, you can withdraw the original amount of your Roth contributions without penalty or tax at any time, even before you retire and regardless of how old you are. That compares with full taxation plus 10% penalties that often apply to traditional IRA withdrawals taken before age 59 1/2.
• Fewer requirements. Conversely, if you don't need access to your funds, you don't ever have to make withdrawals from a Roth IRA. That's different from other retirement accounts, where requirements to take minimum distributions usually start at age 70 1/2.

Best of all, high-income taxpayers who've previously been locked out of Roth IRAs will be allowed to convert existing traditional IRAs into Roths beginning next year, without any maximum gross income limit. You'll pay tax upfront on the amount you convert -- but that may pale in comparison to the taxes you save for the rest of your life.

Do it now
If you haven't started using a Roth IRA for your investments thus far, then you really shouldn't delay any longer. The sooner you start, the faster you'll see your tax-free income start to build inside your account. There's no better feeling than seeing your stocks rise when you know you're going to keep every penny for yourself.

For more on making the most of your savings:

• You're not automatically set for life.
• Do this before you think about investing.
• 4 ways to retire well.