NEW YORK (TheStreet) -- Congress could raise taxes next year, so this is a good time to prepare for the worst by making maximum use of the shelters offered by IRAs, 401(k)s and other retirement accounts. Earnings from sheltered assets can compound tax-free until you take withdrawals.If much of your portfolio must remain in a taxable account, then you will have to decide which assets to shelter and which to leave out in the cold. Your aim should be to protect those investments that generate the biggest tax bills. Among the most tax-efficient holdings are stocks that pay no dividends. If you own such shares in a taxable account and never trade, you can postpone paying taxes indefinitely. But if you tend to trade rapidly, then you could generate short-term capital gains, which are taxed as ordinary income at rates of up to 35%. To avoid big bills, heavy traders should keep stocks in a shelter. VTSMX - Get Report), which has a tax-cost ratio of 0.29. A candidate for a shelter is Vanguard Mid-Cap Value Index ( VMVIX - Get Report), which has a tax-cost ratio of 0.72.
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 - Get Report), 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. DVHYX) and Metropolitan West High Yield Bond ( MWHYX - Get Report). 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 - Get Report). By putting TIPS in your retirement account, you can protect you nest egg against inflation, while sheltering the assets from the taxman.