Dear Dagen: What Funds Should I Buy Now in My Roth IRA?

Taking Advantage of the Tax Deferral

If you want to get a little more complicated with your IRA, you can go with a fund that could really use the benefits of tax deferral. These are funds -- like bond funds -- that generate a lot of income every year, which you will have to pay income taxes on. Within a traditional IRA, you can postpone paying those taxes until the money comes out at your retirement. And in a Roth IRA, you won't pay any taxes at all when you withdraw that money in your later years.

At such a young age, you probably don't need too much of your money in bond funds. But a high-yield or junk bond fund might be worth a look if you already have a broad stock-market fund stashed somewhere else.

High-yield bonds are backed by companies with shaky financials and are the riskiest bonds you can buy. But these bonds pay you higher yields to compensate you for taking on that risk. And the higher the yield, the more taxable income they produce. Plus, these bonds are sporting attractive valuations.

The (VWEHX Quote)Vanguard High-Yield Corporate fund is the cheapest junk bond fund you can buy, charging 0.27% every year. The average high-yield fund takes a full percentage point more every year. The (PRHYX Quote)T. Rowe Price High-Yield fund also has low fees.

And that's one thing to remember whether you buying a fund inside or outside an IRA: Cheap is good.