I am aware that one of the things to look out for in choosing mutual funds is tax efficiency. Rollover and dividend payments can affect this. What I have been wondering is, if your mutual funds are in a tax-deferred account (IRA), is tax efficiency still something you need to worry about? I haven't seen this question addressed in any of the mutual fund materials I've been researching.
Generally the answer no, you don't need to worry about tax efficiency of investments in tax deferred accounts like IRA's and 401K's. That is because no tax is due on these until the money is removed from the account.You do have to worry about cost factors in these accounts. Account maintenance charges. Loads on mutual funds. Transaction fees. Brokerage commissions. Of course the game is to maximize the performance of your investment while minimizing these costs.Usually it is the capital gains distributions on stock mutual funds--especially good performing ones--that cause the large current income tax bills in taxable accounts. To minimize these, index funds and tax managed funds would be the usual choice. There is the long term buy and hold strategy too. In this case, you pay taxes on the dividend the stock pays, but you only pay tax on the gains on the stock in the year you sell it and then probably at capital gains rates.
If your money is in an IRA, don't worry about it. Taxes are not an issue there, because it's all tax deferred or tax free.
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