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Educational Resources

By Theresa Fry, Senior Vice President and Manager, IRAs, Retirement and Education Planning, Jeffrey R. Wolfe, Senior Vice President, Manager of Wealth Planning Strategies and Bruce Buerkle, CFA, Senior Vice President, Manager Securities Research Support

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If you are like most investors, you likely own some mutual funds.  They are common in IRAs, 401(k)s, taxable accounts, etc.  However, when you own mutual funds in a taxable account, there are potential tax consequences to you whether you’ve bought or sold the actual mutual fund holding itself.

Most mutual funds buy and sell securities within their portfolios.  When their internal trading results in net realized gains for the fund (profits), they must pass along those gains and the tax consequences of them, to shareholders in the form of taxable distributions.

Any mutual fund can make a capital gain distribution.  But some mutual funds trade more heavily than others, resulting in a greater chance that net realized gains will result.  For example, equity funds tend to trade more frequently.  Index funds do not.  Some mutual funds are considered “tax-managed” funds and therefore trade very little to minimize the tax impact of capital gain distributions.

Although capital gain distributions can happen during the year, they are typically paid out once a year, and usually in December.  Most mutual fund companies will provide projections of their capital gain distributions in October or November to help you better prepare for the distributions that will be paid to you.  Some years these taxable distributions can be significant, even if the value of the mutual fund is down or has had little increase in value.  You will owe tax on these distributed gains, and any capital gain distributions you receive will be reported on the 1099-DIV form that you use to prepare your taxes.

It is important to remember that you can see a fund’s share price drop when it distributes a capital gain. This can be particularly noticeable if the fund distributes close to or at the end of the year. The overall account value will not change, however, if the capital gain distribution is retained in the account.

Tax considerations are an important part of investing, but they are not the only consideration.  Deciding which funds to invest in, how long to hold them, and managing the taxes that result from them are all important to discuss with your financial advisor and your tax advisor when you meet with them for a review.  To get a better understanding of your mutual fund holdings and any potential capital gains distributions this year, make sure you sit down with your Benjamin F. Edwards financial advisor before December begins in case you want to make changes to your holdings before capital gain distributions are made.

Benjamin F. Edwards & Co. does not provide legal or tax advice, therefore it is also important to consult with your legal and tax professionals for additional guidance tailored to your specific situation.

November 14, 2019 |