An IRA can be a powerful way to save for retirement. But you should invest in such a way that takes maximum advantage of the tax benefits IRAs give you. What's the best way to do that?

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at IRAs and the best way to use them to invest. Dan notes that the key to IRAs is tax deferral, so it makes sense to put your highest-tax investments in an IRA. Dan talks about mortgage real-estate investment trust Annaly Capital (NYSE:NLY) as an example of an investment that usually pays income that's taxed at your highest ordinary income rate and is therefore appropriate for IRAs, as well as business development corporation Prospect Capital (NASDAQ:PSEC) that often distributes a large percentage of income that's taxed at ordinary rates. On the other hand, Dan notes that traditional IRA distributions are always taxed in retirement at your prevailing tax rate, and therefore you won't get the benefit of lower capital gains or dividend rates on stocks. You also won't get the full tax benefits that master limited partnership Kinder Morgan Energy Partners (UNKNOWN:KMP.DL) and its peers offer. Dan concludes that being smart about your IRA can save you a lot in taxes in the long run.

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Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.