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NEW YORK (CNN/Money) - My husband and I are in our early 30s and we max out our 401(k)s and IRAs. We're looking to invest more money outside those accounts, but don't want to incur a lot of taxable gains. We're debating between index and tax-managed funds. Which way do you think we should go?

-- J.J., South Carolina

Let me start by saying that you shouldn't let taxes -- or, more specifically, avoiding them -- drive your investing strategy. Your first priority should be to assure that you've got a well-diversified portfolio for someone your age and with your risk tolerance.

In your case, that would likely mean building a portfolio predominantly invested in stock funds, although I believe even young aggressive investors should keep at least a small portion of their holdings in bond or bond funds. For tips on how you might divvy up your portfolio among different types of stock and bond funds, I suggest you check out our Asset Allocator tool.

That said, however, I have no problem with you using either index or tax-managed funds to minimize the amount of taxes you pay on gains within the taxable portion of your investment accounts. Let's take a look at each.

With index funds, you're buying a portfolio that matches a specific benchmark or market index. That index could be anyone of dozens available today, although the most popular tend to be indexes of large-company stocks such as the Standard & Poor's 500-stock index, indexes of small-company shares such as the Russell 2000 or indexes that comprise the entire universe of U.S. stocks, that is, a Total Stock Market index.

Index funds tend to be inherently tax-efficient because, unlike with regular mutual funds, the manager isn't doing a lot of trading that can generate taxable gains that must distributed to shareholders. Instead, the manager of an index fund pretty much buys and holds shares of the stocks in the index.

Nonetheless, index funds can and do generate taxable gains. One reason is that the fund manager may have to sell shares at a gain to drum up cash to pay investors who are redeeming shares of the fund. Another reason is that the indexes themselves sometimes change -- some stocks are added to the index, others dropped -- which means the manager may have to unload some shares at a profit, thus creating taxable distributions.

Even in those cases, however, a savvy manager may be able to take steps to keep taxable distributions down, and in general, index funds are significantly more tax-efficient than actively managed portfolios.

Tax-managed funds, on the other hand, are a somewhat different breed. Managers of these funds take active steps to reduce the possibility of generating taxable gains for their shareholders.

For example, the manager may purposely sell some stocks for losses specifically so those losses can offset gains in the future, thus reducing or even eliminating taxable distributions. Similarly, the manager may sometimes sell shares with the highest cost in order to create as small a gain as possible, or in some cases even a loss.

Using these and other techniques, a manager of a tax-managed fund should be able to pretty well minimize, if not entirely eliminate, distributions of taxable capital gains, that is, gains attributable to price appreciation of the securities the fund owns.

To the extent a tax-managed fund receives dividends or interest, however, there's not much the manager can do to eliminate that income. The fund's expenses can be used to offset those payments. But any dividends or interest in excess of the fund's expenses must be passed along to shareholders in the form of taxable distributions.

Still, unless you're dealing with a tax-managed fund that holds a substantial amount of dividend-paying stocks or bonds, these taxable distributions of income payments aren't likely to be a huge matter, and certainly less of an issue than the taxable distributions you might receive from a regular mutual fund.

So which is better, index or tax-managed? From the standpoint of minimizing taxes, I'd probably give the edge to tax-managed funds

Frankly, though, I don't think the edge is large enough for most investors to devote a huge amount of time to this issue. Which is to say, if you've already built a portfolio of index funds in taxable accounts or you just prefer the simplicity of index investing, I don't think you're damaging your financial future by going that route.

After all, you're only postponing taxes, not avoiding them altogether (unless you die and pass the fund shares onto someone else -- and, who knows, even that tax break could change). Besides, index funds tend to have lower expenses than tax-managed funds, so while you may be losing a bit in tax-efficiency, you're giving up less of your return to costs.

At least one fund company, however, combines the low-cost advantage of index investing along with the tax-minimizing strategies of a tax-managed fund. Vanguard has series of tax-managed funds (Tax Managed Balanced, Capital Appreciation, Growth and Income, Small-cap and International) that attempt to minimize taxable distributions while also tracking various indexes.

So if you want the discipline, certainty and low-costs of indexing plus the tax advantages of a tax-managed fund, these portfolios may be just what you need to stop your internal debate about index vs. tax-managed funds.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."