A Year-End Surprise Your Portfolio Could Do Without

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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.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West (RIP JB) and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.

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