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March 22, 2022 at 10:23 AM
Related: Mutual Funds vs. ETFs: Which Are Better for Retirement Portfolios?
Russel Kinnel, director of manager research at Morningstar, recently selected a baker’s dozen of funds that he says are good fits for IRAs.
“All of them have some tax disadvantages, which are wiped away by the IRA tax shelter and thus a better fit for a tax-sheltered account,” Kinnel wrote in a blog post.
Some of the funds are best suited for a long-term time horizon, and so fit well into a retirement account, he said.
Investors have until April 18 to contribute to an IRA.
In selecting the funds, Kinnel looked at five-year tax-cost ratios, which indicate in basis points what an investor would have lost to taxes if the fund were held in a taxable account.
The sums are modest relative to returns, but are still larger than they would be for the most tax-efficient vehicle types, such as index funds and municipal-bond funds.
He noted two exceptions among the funds (see gallery). These funds, which give back the biggest percentage of their returns, are relatively low-risk bond funds that “very much belong behind a tax-sheltered wall.”
Kinnel said the most volatile funds among those he selected require a true long-term outlook, while some of the milder ones may work even when investors begin to withdraw money in retirement.
See the gallery for 13 funds to buy for an IRA, ranked from highest to lowest five-year standard deviation.
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