Home About Archives RSS Feed

The Independent Investor: Beware the Tax Hit From Mutual Funds

By Bill Schmick
iBerkshires columnist
Plenty of investors will be faced with an unpleasant surprise. Any day now, one or more of the mutual funds that you own will be sending out their capital gain distributions for the year.
The tax hit could be quite large this year.
Many investors are not aware that mutual fund companies are required to distribute at least 95 percent of their capital gains to investors each year. Given the double-digit gains in the stock market last year, those gains could be an unwelcome liability when tax time rolls around.
At this late date, there is little one can do about it, other than pay the piper, but this year you can take steps to minimize 2018's potential tax liability. Since the tax reform act did not change capital gains taxes, you can expect that short-term capital gains (less than 12 months) will be taxed at the same rate as your income tax bracket. Long-term capital gains, however, will continue to be taxed at 15 percent.
The job of most mutual fund managers is to buy low and sell high. That's what creates track records, which, in turn, attracts investors to their funds. But mutual funds are just like individuals when it comes to capital gains. Anytime a mutual fund sells a security, no matter what the asset, that gain is taxable. And since mutual funds are considered pass-through entities, they are required to pass along to you any of these taxable gains.
In the grand scheme of things, capital gains distributions could be considered a luxury problem since we want the mutual fund we are invested in to turn a profit for us. So producing capital gains (as opposed to capital losses) is a good thing. But some caveats do apply.
Distributions reduce the fund's net asset value, regardless of whether they are long-term, or short-term capital gains, qualified dividends, or a return of capital. The problem might be in the timing of your purchase. If, for example, you purchased such a fund after all the gains were made, but before the distribution, you will be sent the capital gain (plus the taxes you will owe) while the mutual fund you purchased would decline by the amount of the distribution. You would be left with an after-tax loss on that mutual fund investment.
So the morale of this tale is if you are going to stay invested in mutual funds in a non-retirement account you better start tracking the upcoming capital gains distributions on the funds you own or are considering purchasing. In general, most mutual funds pay one or two capital gain distributions each year, normally sometime during the summer, and the last one toward the end of the year (late November or December). Try to avoid buying mutual funds at those times.
The mutual fund industry is aware of how these sudden taxable events impact shareholders. Most managers try to avoid dumping huge gains on investors, especially short-term gains, which are taxed at a higher rate. However, at certain times, they are forced to do just that.
During market declines, for example, when they are faced with unusually large redemption requests, then fund managers may be forced to liquidate positions that they would have preferred to hold, but can't.
Today a shareholder of mutual funds can easily find out when and what upcoming distributions will be made by simply accessing each mutual fund's website. There, you will find a wealth of information concerning distributions. Many fund websites will give you distribution guidance several months before the event. That makes it easier for you to make informed investment decisions.
Bill Schmick is registered as an investment adviser representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires.  Bill's forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.
News Headlines
Williamstown Community Preservation Committee Has Just Two Applicants
Adams-Cheshire Hopes to Conclude Agreement Before Superintendent Retires
Pittsfield Extends Lease For Offices at 100 North St.
Alcombright Honored Following MLK Day of Service
Biz Briefs: Crissey Farm Honored for Excellence in Wedding Venues
Williams College Seeks 'Books' for Human Library Project
Berkshires Beat: Real Women Essay Contest Entries Sought
Gubernatorial Candidate Warren Talks Opioids In Pittsfield
North Adams Library To Host 'Look Up' Film Series Dedicated To Cariddi
Pollinator-Friendly Events Planned in Wiliamstown This Spring

Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.




@theMarket (246)
Independent Investor (336)
January 2018 (4)
January 2017 (2)
December 2017 (8)
November 2017 (5)
October 2017 (5)
September 2017 (5)
July 2017 (2)
June 2017 (8)
May 2017 (7)
April 2017 (7)
March 2017 (8)
February 2017 (8)
Taxes Retirement Greece Energy Japan Debt Ceiling Wall Street Pullback Economy Commodities Euro Bailout Debt Election Rally Currency Stocks Europe Banks Congress Oil Markets Stimulus Federal Reserve Jobs Deficit Selloff Europe Fiscal Cliff Recession Housing Interest Rates Metals Stock Market Crisis
Popular Entries:
The Independent Investor: Don't Fight the Fed
@theMarket: QE II Supports the Markets
The Independent Investor: Understanding the Foreclosure Scandal
@theMarket: Markets Are Going Higher
The Independent Investor: Does Cash Mean Currencies?
The Independent Investor: General Motors — Back to the Future
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Why Are Interest Rates Rising?
The Independent Investor: Will the Municipal Bond Massacre Continue?
The Independent Investor: How Will Wall Street II Play on Main Street?
Recent Entries:
@theMarket: Melt-Up Continues
The Independent Investor: The Cost of MAGA
@theMarket: Look! Up in the Sky! It's a Bird ... It's a Plane ... It's the Stock market!
The Independent Investor: Beware the Tax Hit From Mutual Funds
The Independent Investor: Confusion Reigns as Taxes Change
@theMarket: The Market That Keeps on Giving
The Independent Investor: To Roll, or Not to Roll Your 401(k)
@theMarket: Here Comes Santa
The Independent Investor: Should You Roll Your 401(k) Into an IRA?
@theMarket: Should Be Good Month for Stocks