This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

How to Cut Taxes on Your Nest Egg: Tax Shelters

Many actively managed equity funds belong in shelters. Portfolio managers often sell winning stocks and book capital gains. In their prospectuses, some funds indicate that they do not aim to limit tax bills. Portfolio managers take this position because many shareholders hold the funds in tax-shelters.

Equity funds can generate particularly large bills if they hold dividend stocks, which produce income that can be taxed at rates of up to 15%. "If an equity fund has a robust dividend yield, then it could be better to put it in a tax-sheltered account," says Christine Benz, Morningstar's director of personal finance.

A fund that should be sheltered is Yacktman (YACKX), which has a tax-cost ratio of 1.18. Yacktman ranks as one of the top performers of the past decade, but the big gains resulted in steep capital-gains tax bills. In addition, the fund holds many dividend-paying stocks.

Most taxable bonds belong in shelters. Interest income from bonds can be taxed as ordinary income. Among the least tax-efficient choices are high-yield bonds, which pay rich yields. Most high-yield bond funds have tax-cost ratios of more than 2.5. Top-performing choices with steep tax-cost ratios include Transamerica Partners High Yield Bond (DVHYX) and Metropolitan West High Yield Bond (MWHYX).

Treasury Inflation-Protected Securities, TIPS, have special reasons to be sheltered. TIPS provide returns in two ways. Like other bonds, they make fixed interest payments. In addition, the principal value of the securities rises along with the consumer price index. Say you put $1,000 into TIPS, and inflation rises by 3% for the year. Your principal will rise to $1,030, and you will owe taxes on the appreciation. A fund with strong returns and a steep tax-cost ratio is Hartford Inflation Plus (HIPAX). By putting TIPS in your retirement account, you can protect you nest egg against inflation, while sheltering the assets from the taxman.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $95.38 1.90%
FB $118.01 -0.47%
GOOG $695.76 -0.35%
TSLA $236.76 -2.10%
YHOO $36.21 -0.88%


Chart of I:DJI
DOW 17,780.25 -110.91 -0.62%
S&P 500 2,065.22 -16.21 -0.78%
NASDAQ 4,778.7780 -38.8160 -0.81%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs