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3 Great Investments for Your IRA

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As the deadline for filing our 2011 taxes approaches, many investors are scrambling to figure out just how much they owe the government and how they can minimize that tax bill. While there's not much you can do to change what you earned or spent last year, you do still have a few weeks to take one action that can potentially cut down on your tax liability: Make a contribution to a traditional IRA. Investors have until April 17 to make a tax-deductible contribution for the 2011 calendar year.

Of course, there are some IRS-related rules that may limit your eligibility to take this tax break depending on your income level and whether or not you or your spouse are already covered by an employer-sponsored retirement plan. But if you qualify, you've still got time to get your 2011 contribution in. Investors under 50 can contribute a maximum of $5,000 to an IRA, while folks 50 or older can add $6,000 every year.

And while investors should have access to a number of high-quality actively managed mutual funds within their IRA, you may want to consider the tax benefits of owning certain types of funds in such an account. For example, since you don't pay taxes on any dividends, fund distributions, or capital gains until you withdraw the money from a traditional IRA (or you won't pay any taxes at all if you own a Roth IRA), a tax-favored account like this is an ideal place to stash high-turnover funds that might otherwise not make sense in a taxable account. To that end, let's take a look at three solid funds with higher turnover ratios that could be decent options within an IRA.

American Century Disciplined Growth (ADSIX)
This large-cap growth fund looks for rapidly growing blue chip companies with strong and sustainable earnings. As might be expected, information technology accounts for the largest chunk of change, to the tune of nearly one-third of fund assets. Market leaders Apple (Nasdaq: AAPL  ) and Microsoft (Nasdaq: MSFT  ) take center stage here, thanks to their consistent history of growth and innovation as well as their enormous cash reserves.

Annual turnover here clocks in at 117%, which means that management turns over its entire portfolio every year. While the fund has only been in existence for about six-and-a-half years, its two managers have been with the fund since its inception. In the past five-year period, Disciplined Growth has turned out an annualized 4.9%, putting it ahead of 72% of all large-growth funds. Its high turnover means this fund won't be right for many taxable investors, but thanks to its consistent process and moderate risk profile, it could be a good fit for folks looking to fill an aggressive growth slot in their IRA or other tax-advantaged account.

Scout Mid Cap (UMBMX)
In their search for attractively priced midsize companies, management at Scout Mid Cap engages in a more aggressive buying and selling process. At last glance, annual turnover here measured in at a hefty 195% a year, which means the team basically turns over almost the entire portfolio twice every year. Such rapid-fire trading makes this fund an ideal candidate for an IRA so investors don't have to worry about being taxed on any capital gains until they withdraw their money.

The fund's defensive positioning last year helped it to plot a steady course as volatility shook the markets. Consumer discretionary stocks were a prime focus, with management adding American Eagle Outfitters (NYSE: AEO  ) and Macy's (NYSE: M  ) to the portfolio, as both retailers exhibited strong cash flow and balance sheets along with reasonable valuations . Over the most recent five-year period, Scout Mid Cap lands in the top 1% of all mid-cap blend funds with an annualized 10.1% gain. This fund is an all-around mid-cap winner.

Managers PIMCO Bond (MBDFX)
Bond funds are another ideal candidate for IRA investors since they make frequent income distributions and often tend to have higher turnover. One contender that would make an excellent core bond selection is Managers PIMCO Bond, run by none other than Bill Gross. This fund invests in a range of fixed-income securities, including government, corporate, and mortgage-backed bonds.

With an annual turnover of nearly 500%, there are a lot of potential taxable events here for investors. In the most recent 15-year period, this fund shot ahead of 96% of all intermediate-term bond funds with an annualized return of 7.2%. The fund isn't immune to short-term stumbles, as evidenced by last year's trailing performance spurred by Gross' premature Treasury sell-off, but long-term prospects here are quite good. If you're looking for a solid core fixed-income fund for your IRA, Managers PIMCO Bond is one of the better choices around.

High-turnover funds like these may not always make sense in a taxable account, but thanks to the tax-deferred powers of many retirement accounts like IRAs, you can still own these investments without having to worry about tax liabilities until far into the future.

Whether you're relying on an IRA, 401(k), or pension to fund your retirement, your golden years could still be at risk. Be sure to check out our newest special free report that highlights the shocking truth about your retirement. Don't miss this chance to grab your free copy of this can't-miss report today!

Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. She owns shares of Managers PIMCO Bond. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On April 04, 2012, at 11:26 AM, DCUDFlyer wrote:

    I really enjoyed this article, Amanda. Informative while easy enough to understand.

    Would you have any ideas as far as ETF alternatives to these investments? I tend to prefer ETFs to MFs for a number of reasons, including initial investments! If you or anyone else in the Motley Fool community have any thoughts, I'd love to hear it.

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Amanda Kish
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Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter.

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