A Great Pick for Your IRA

While we have until tax day to make "prior year" IRA contributions, it's never too early to contemplate where, exactly, you want to send last year's IRA contribution. After all, that represents $5,000 you can put to work on a tax-favored basis -- and a cool $6,000 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 working for your financial independence, this is one deal you don't want to miss.

But now's the time to get going. Given our busy lives, this year's tax filing (and IRA-funding) deadline will be here before you know it. And when it comes to growing your nest egg, there's no need to make a hasty decision.

Haste makes waste
You can always go the index-fund route, after all. Plunk down your IRA cash on the SPDRs (SPY) exchange-traded fund -- a dirt cheap S&P tracker -- and you'll instantly procure exposure to the likes of Oracle (Nasdaq: ORCL  ) , Bank of America (NYSE: BAC  ) , and Cisco (Nasdaq: CSCO  ) . Verizon (NYSE: VZ  ) and Wells Fargo (NYSE: WFC  ) are near the top of the ETF's mix as well, as are IBM (NYSE: IBM  ) and JP Morgan Chase (NYSE: JPM  ) .

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. Among the picks that appear in the portfolio of the Fool's Ready-Made Millionaire lineup, there's a small-cap fund with a triple-digit turnover rate. The manager's strict sell discipline -- a key feature of the way he plays effective defense -- accounts in part for that aspect of the fund's strategy. Over the long haul, he's cranked out peer- and market-besting returns for his shareholders.

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.

A Foolish final word
If you're in a pinch and need an IRA pick in a hurry, SPDRs are 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 set-and-forget lineup of terrific IRA picks that has what it takes to beat the market over the long haul, stay tuned for the reopening of Ready-Made Millionaire. That'll occur in advance of the upcoming IRA funding deadline, giving you time to check out an IRA-worthy lineup of stocks and funds you can use to feather your nest egg.

In the meantime, be sure to learn more about the service by clicking right here. We'll let you know just as soon as we reopen, and you'll be able to snag a free copy of The 11-Minute Millionaire, a Foolish write-up designed to help you navigate up markets and down.

This article was originally published on April 3, 2007. It has been updated.

Shannon Zimmerman runs point on the Fool's Ready-Made Millionaire service. Bank of America and JP Morgan Chase are Motley Fool Income Investor recommendations. You can check out the Fool's strict disclosure policy by clicking right here.


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