A year-end surprise you don’t want to receive is a tax bill from your mutual fund. Over the years, I’ve soured on mutual funds. One reason is the lack of control. You don’t control when the fund manager buys and sells positions. It can be particularly painful when you get a year-end capital gains tax bill after a year the mutual fund in question lost money. I prefer to do tax planning on my own schedule, thank you.
Laura Saunders writes in The Wall Street Journal:
After years of strong markets, many managers had few losses this year to offset gains on sales of winners. So when fundholders sold as markets tumbled, the managers often had to sell winners to meet redemptions—and the capital gains on the sales were then spread among remaining fundholders.
To be sure, the payouts can be in cash—so fundholders don’t have to come up with money for the taxes unless they reinvest payouts in the fund. But many do reinvest, and either way fundholders owe taxes that cut into assets when down markets are also shrinking them.
Is this unfair? It feels that way to Ed Abahoonie, a retired CPA living in Sparkill, N.Y., who has mutual funds in taxable accounts with large payouts this year.
On the other hand, this year’s tax downside came after a long upside. “When funds are growing in value and managers aren’t selling, there’s often a large tax-deferral benefit and few distributions,” says Brian Schultz, a tax and investments specialist with the accounting firm Plante Moran.
Affected investors need to decide soon how to handle these payouts or risk owing a surprise tax bill. Here are moves to consider.
Action Line: If you need help building a portfolio of individual securities where you have control, let’s talk. Before our conversation, get to know me better by subscribing to my free Survive & Thrive letter by clicking here.
E.J. Smith - Your Survival Guy
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