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Good Funds, but Better In an IRA

Adding these funds to your retirement account lets you reap the benefits without adding to your tax bill.

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The April 17 income tax filing deadline is just around the corner and with it the deadline to contribute to an IRA for 2011. If you're a regular visitor to Morningstar.com, you already know the importance of saving for retirement, but don't overlook the value of an IRA as a destination for holdings that can have heavy tax consequences when held in a taxable account. Among funds that tend to be more tax-inefficient are those offering high dividends and those that buy and sell frequently, triggering capital gains distributions.

When you hold such investments in a taxable account, those capital gains and dividend distributions might boost your income enough to put you into a higher tax bracket. In addition, ordinary income tax rates, as well as rates on dividends and capital gains, are set to rise at the outset of 2013. That makes it all the more important to keep tax-efficient investments within your taxable accounts while locating tax-inefficient investments inside of an IRA.

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Adam Zoll does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.