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Watch out for Capital Gains Distributions
[/fusion_text][fusion_text]Early in my career I worked in the mutual fund accounting department at Ameriprise Financial. Believe it or not, there are a lot of calculations that go into running a mutual fund. It was still pretty easy. Computers do most of the work. I was there to make sure the computers didn’t make any mistakes. In addition to the computers, a big part of the reason it was so easy was because there was a separate department that took care of all the tax calculations.
Every piece of taxable income received by the fund (either from dividends or from capital gains on stock sales) needs to be paid out to investors before year-end. Right around now, the mutual fund’s tax department starts working overtime to calculate how much income and capital gains investors can expect. In fact, we are starting to see those estimates and share them with clients.
Thankfully it’s shaping up to be another low tax year for investors in index and index-like mutual funds. For example, that may mean even though your portfolio is up 10%, you might only owe tax on 2% of it. Index mutual funds are very tax efficient. They try to defer gains as long as possible and let you defer the tax until you need to sell some of the fund.
The same can’t be said for actively managed mutual funds. I saw in the Wall Street Journal last week that some mutual funds are expected to pay out 10% or more of their value in capital gains distributions. Ouch!
There are many reasons why traditional actively managed mutual funds tend to hand out higher tax bills than their index peers. First and foremost is that most of the managers pay no attention to taxes. That’s a big mistake. If you find yourself in one of those funds, maybe you should consider a new strategy, one that’s designed to keep your tax bills low.[/fusion_text][separator style_type=”single” top_margin=”” bottom_margin=”” sep_color=”” icon=”” width=”” class=”” id=””][fusion_text]
Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. ASA gathers its data from sources it considers reliable. However, ASA makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.