Should You Consider Tax-efficient Growth Funds?

Physician's Money Digest, January31 2004, Volume 11, Issue 2

If you're looking for tax-saving investments beyond IRAs and 401(k)s, tax-efficient growth funds might be your best bet. A study by T. Rowe Price revealed that in comparison to regular growth funds and nondeductible IRAs, "tax-efficient growth funds could provide after-tax savings and greater after-tax total withdrawals over varying time periods." The study appears to show that these funds are managed to reduce taxable distributions and the tax advantages grow over time and as tax rates increase.

In addition, investors who qualify for a Roth IRA or a traditional IRA would receive more total after-tax income in retirement. Because these funds limit annual taxable distributions to investors, they may be more beneficial in all scenarios. On the negative side, the study showed that "the advantages of these funds only hold up if its pretax return comes close to that of the other accounts."