When mutual funds investing in stocks throughout the year buy and sell different companies, they generate profitable trades (hopefully) that add up to "realized" taxable gains. If the mutual fund is not in a retirement plan of some sort, investors in those mutual funds receive a form 1099 at the end of each year detailing how much their share of those taxable gains turned out to be. This information goes on our tax returns and we pay taxes accordingly.

However, a fund might have invested in, say, Apple (AAPL) and never sold it. The stock has quintupled in value, but because it was never sold by the mutual fund, that gain is known as "unrealized" profit and no annual gain had to be reported.

Then, when we sell a mutual fund years later at a higher price than we paid for it, we calculate the difference in price (we bought it for $1,000, say, and we're selling years later for $2,000 (a gain in part thanks to the Apple stock that the fund never sold) and we owe taxes on that $1,000 profit.

However, we are allowed to reduce our profit by all the gains that we paid taxes on over the years that we owned the fund.

So, how do we minimize the tax hit on our after-tax money? Index funds, tax-managed mutual funds, municipal bonds and annuities offer tax-shelters outside of a retirement plan.

Index funds just invest in a broad cross section of companies within a specific type. For example, an S&P 500 index fund invests in the largest 500 companies in the country. As a result, these funds have very little "turnover" due to trading. A typical amount might be as little as 5 percent of the total portfolio per year.

An index fund that does very little trading generates very little in annual "realized" profits that would otherwise trigger annual taxable income. Years later, then, when a portion of the fund is sold, little in the way of "realized" profits have been reported along the way. What would have been paid in taxes is still sitting in the investment.

The distinction offered by index funds is that the profits are effectively controlled by the investor. Someone "nibbling away" at their index funds to support themselves in retirement might be paying relatively little in taxes on the distributions from those funds. The money left in continues to grow. Exchange-traded funds (ETFs) are another form of index fund.

Tax-managed mutual funds are those that are sensitive to the tax hit, so they solve this problem by selling some stocks at a profit each year while "harvesting losses" that will offset the gains. The net effect is that their investors reviewing their year-end 1099 tax reports from the fund will see that they will not have to come up with more money for taxes.

For interest income, so-called "tax free munis" are municipal bonds that offer interest free of federal and state income taxes. Considering that interest earnings are taxed at the highest marginal rates, the advantage of paying no taxes makes the net spendable money higher, in many cases, than taxable interest would have generated -- after taxes.

Annuities are insurance products that allow investors to accumulate money in a tax-deferred shelter, just like that of a retirement plan. However, annuities can be expensive and come loaded with conditions and features that increase commissions and create penalties for early withdrawal.

Managing after-tax money can benefit from some professional help from time to time. A good CPA can help with some investment tax advice and a reasonably-priced fee-only financial advisor can be worth consulting if this subject matter gives you a headache.

Steve Butler is president of Pension Dynamics. Contact him at 925-956-0505, ext. 228.