A Great Pick for Your IRA

Listen. Can you hear it? That ticking sound is the timer counting down the days you have left to fund (pun intended, as you'll see) your IRA for the 2006 tax year.

That's $4,000 you can put to work on a tax-favored basis -- $5,000 if you were 50 or older last year. Considering that every cent that stays in your account (as opposed to Uncle Sam's coffers) is a cent that's working for your financial independence, this is one deal you don't want to miss. But now's the time to get going: This year's tax-filing (and IRA-funding) deadline is a mere 14 days away!

Haste makes waste
Still, though time is short, there's no need to make a hasty decision. You can always go the index fund route, after all. Plunk down your IRA cash on Vanguard 500 Index (FUND: VFINX) -- a world-class S&P tracker -- and you'll instantly procure dirt cheap exposure to the likes of ExxonMobil (NYSE: XOM), Bank of America (NYSE: BAC), and IBM (NYSE: IBM) -- blue-chip stalwarts that currently sport below-market price-to-earnings ratios.

Alas, you'll also procure market-lagging performance. Though some crafty types can recover a portion of their costs, index funds are more or less destined to lose to the benchmarks they track by about the amount of their fees. I think you can do better than that. That's especially true when you consider that, thanks to their typically low rates of turnover (and therefore their small capital gains payouts), index funds aren't the smartest plays for your tax-favored accounts anyway.

Enter actively managed funds
Instead, consider using your IRA account as a parking spot for those investments that, at least in relative terms, tend not to be especially tax-efficient -- high-turnover mutual funds included. It's true that most funds that fit that profile aren't fit for investing. Their managers' high-churn ways simply reflect a tendency to chase last year's winners, as opposed to a strict valuation and sell discipline.

There are important exceptions to that rule, however, and in the current issue of Motley Fool Champion Funds, the Fool investment service that I head up, we name names, including a fund that, between October 1997 and the close of February 2007, delivered a total return of more than 390%. (For the sake of comparison, Vanguard 500 delivered roughly 71% over that same period.)

Make no mistake: Past performance, as they say, is no guarantee of future results. But given that the manager who racked up that track record remains large and in charge, I like this fund's chances -- a lot. Prospective investors should strike an aggressive profile, though: The fund sports a triple-digit turnover rate, and its asset base of more than $2 billion was stuffed into just 24 names at the close of 2006. That lineup, by the way, was heavy with energy, financial and industrial names, with Schlumberger (NYSE: SLB), Citigroup (NYSE: C), and Deere (NYSE: DE) soaking up more than 11% of assets.

A Foolish final word
If you're in a pinch and need an IRA pick in a hurry, Vanguard 500 is a worthwhile choice, albeit one that's destined to lose to the market and won't allow you to take maximum advantage of an IRA's tax-favored treatment.

If, however, you're interested in a terrific IRA pick that has what it takes to beat the market -- and a history of doing just that -- consider taking Champion Funds for a completely free spin by clicking here. Your pass provides access to our full list of recommendations, as well as our annual review -- a to-the-point overview of every fund we've recommended.

Take Champion Funds for a test drive now, and you'll also have access to our latest special reports: The Challenge: ETFs vs. Mutual Funds and Add Kick to Your 401(k)! Just click here to snag the reports, along with your free 30-day guest pass.

Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light with his pal Dayana Yochim. At the time of publication, he didn't own any of the securities mentioned above. Bank of America is a Motley Fool Income Investor pick. You can check out the Fool's strict disclosure policy by clicking right here.