Beware the Mutual Funds' End-of-the-Year Tax Trap
- Wednesday, November 30, 2011
Most funds make distributions at roughly the same time each year (December is the busiest month of all), and can usually tell you ahead of time when they will happen. This presents an opportunity for savings. Before making a major purchase of shares in any mutual fund, call the fund and ask (1) if a distribution will be made soon, and (2) do they have an estimate of the amount. Many funds also post this information on their website. If a distribution is scheduled soon, you have the option of waiting to purchase your shares the day after the distribution to avoid its tax impact.
You can also use this information to advance the sale of any holdings you expect to sell in January for rebalancing reasons. By moving now to sell those positions that are worth less than the purchase, you may be able to avoid a big distribution and also book a loss that will offset other gains on next year's tax return. But keep in mind that if you earn a profit (i.e., you sell your shares for more than you paid for them), you'll have to pay capital gains tax on your profit next April.
One cautionary note: A preoccupation with taxes can end up being counterproductive. Trying to save on taxes can sometimes cause an investor to miss good returns by buying late or selling early. So don't let tax considerations become the overriding factor in your decision to buy or sell a particular fund.
Published since 1990, Sound Mind Investing is America's best-selling financial newsletter written from a biblical perspective. Visit the Sound Mind Investing website .
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