Like many people, you probably own mutual funds both in your retirement accounts—such as IRAs, 401(k)s and profit-sharing plans—and in your regular or non-retirement accounts.

Qualified retirement accounts can offer a powerful tax advantage over their non-retirement counterparts. In a qualified retirement account, money can grow tax-deferred. Freed from constant erosion due to annual income taxes, your money has the opportunity to compound faster than it would in a taxable account earning the same return.

How can you get this tax advantage? Consider putting the funds that are likely to produce the highest taxable gains in your retirement accounts (where they can compound tax-deferred until you withdraw them at retirement), while keeping funds with a likelihood of lower taxable gains in your non-deferred accounts.

Which funds go where?
Which funds are likely to produce higher or lower taxable gains? A good indicator can be found in the fund's prospectus. In the financial highlights section of the prospectus, you'll find the fund's turnover rate, which tells you how much buying and selling has historically occurred in the fund's portfolio. A 50 percent turnover rate, for instance, means that in the preceding year, the fund sold half its holdings. Funds with higher turnover rates tend to generate relatively high capital gains — and capital gains taxes. While past performance is not an indicator of future results, a fund's historical turnover rate may give you an idea of what kind of turnover — and potential taxable gains — may occur in the future.

Suppose, for example, you have a taxable account and an IRA, and you're considering two equity funds. The first fund buys and sells often, producing frequent capital gains distributions to shareholders that are taxed each calendar year. The second is an index fund (a fund that seeks to track an index of securities) that tends to have low turnover within its portfolio. In this example, it might be tax-efficient to invest in the index fund in your taxable account, while putting the high-turnover fund in your IRA, where its relatively higher distributions will be tax-deferred.

Consider your objectives
A word of caution, however: Don't select funds based on the gains they may or may not produce. Make sure the fund meets your objectives. Consider a range of factors, including the track record and tenure of its manager, the fund's objective, risk profile, performance, fees and expenses. You'll find this information in the fund's prospectus. Be sure to read it carefully before investing.

Keep in mind that your goals for your taxable accounts and your retirement savings may be different. If, for example, you are many years away from retirement, you may want to emphasize long-term investments — like equity funds — within your retirement accounts. But be prepared for a higher level of volatility.

On the other hand, you may have shorter-term goals for the money in your taxable accounts like saving for the down payment on a house you plan to buy in the next two or three years. In this instance, you might choose funds with shorter time horizons, even though they might produce higher capital gains.

This assumes you have the same investment flexibility within your retirement accounts as you do outside them. In truth, however, many retirement accounts — particularly 401(k)s and other employer-sponsored plan accounts — offer a limited selection of funds. As a result, you may not be able to own a specific fund within your retirement account.

Consult your tax advisor
While placing higher-turnover funds in your retirement accounts may allow you to take advantage of their tax-deferred nature, it's always wise to talk with your tax advisor before making any move with tax implications, particularly one that may involve both ordinary income and capital gains taxes. But under the right circumstances, your advisor may agree that placing higher-turnover funds in your retirement accounts may be an appropriate tax strategy.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities mentioned may not be suitable for everyone. Each investor needs to review a security transaction for his or her own particular situation. Data contained here is obtained from what are considered reliable sources; however, its accuracy, completeness or reliability cannot be guaranteed.

Learn more about Charles Schwab Co.