A Great Pick for Your IRA

To my way of thinking, it's never too early to contemplate where, exactly, you want to send this year's IRA contribution. After all, that represents $4,000 you can put to work on a tax-favored basis -- and a cool $5,000 if you were 50 or older last year. Considering that every cent that stays in your account (as opposed to Uncle Sam's coffers) is a cent that's working for your financial independence, this is one deal you don't want to miss. But now's the time to get going: Given our busy lives, next year's tax filing (and IRA-funding) deadline will be here before you know it. And when it comes to growing your nest egg, there's no need to make a hasty decision.

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Haste makes waste
You can always go the index fund route, after all. Plunk down your IRA cash on the SPDRs (SPY) exchange-traded fund -- a dirt cheap S&P tracker -- and you'll instantly procure exposure to the likes of Merck (NYSE: MRK) and Wells Fargo (NYSE: WFC). JPMorgan Chase (NYSE: JPM) and ConocoPhillips (NYSE: COP) are in the ETF's mix as well.

Alas, you'll also procure market-lagging performance. Though some crafty types can recover a portion of their costs, index funds are more or less destined to lose to the benchmarks they track by about the amount of their fees. I think you can do better than that. That's especially true when you consider that, thanks to their typically low rates of turnover (and therefore their small capital gains payouts), index funds aren't the smartest plays for your tax-favored accounts anyway.

Enter actively managed funds
Instead, consider using your IRA account as a parking spot for those investments that, at least in relative terms, tend not to be especially tax-efficient -- high-turnover mutual funds included. It's true that most funds that fit that profile aren't fit for investing. Their managers' high-churn ways simply reflect a tendency to chase last year's winners, as opposed to a strict valuation and sell discipline.

There are important exceptions to that rule, however. And in the April issue of Motley Fool Champion Funds, the Fool investment service I head up, we name names, including a fund that, between October 1997 and the close of April 2007, delivered a total return of more than 435%. (For the sake of comparison, SPDRs delivered roughly 80% over that period.)

Make no mistake: Past performance, as they say, is no guarantee of future results. But given that the manager who racked up that track record remains large and in charge, I like this fund's chances -- a lot. Prospective investors should strike an aggressive profile, though: The fund sports a triple-digit turnover rate, and its asset base of more than $3.5 billion was recently stuffed into just 22 names, a group that includes Research In Motion (Nasdaq: RIMM) and Hansen Natural (Nasdaq: HANS).

A Foolish final word
If you're in a pinch and need an IRA pick in a hurry, SPDRs is a worthwhile choice, albeit one that's destined to lose to the market and won't allow you to take maximum advantage of an IRA's tax-favored treatment.

If, however, you're interested in a terrific IRA pick that has what it takes to beat the market -- and a history of doing just that -- you can check out Champion Funds (for free) by clicking here. You'll enjoy access to our full list of recommendations, as well as our annual review -- a to-the-point overview of every fund we've recommended.