About Us Contact Us Help




Handle With Care: Mutual Funds And Taxes

Neil Mukherjee

Handle With Care: Mutual Funds and Taxes

Many people overlook taxes when planning their mutual fund investments. But you’ve got to handle these valuable assets with care. Here are some tips to consider.

Avoid year-end investments

Typically, mutual funds distribute accumulated dividends and capital gains toward the end of the year. But don’t fall for the common misconception that investing in a fund just before a distribution date is like getting “free money.”

True, you’ll receive a year’s worth of income right after you invest. But the value of your shares will immediately drop by the same amount, so you won’t be any better off. Plus, you’ll be liable for taxes on the distribution as if you had owned your shares all year.

You can get a general idea of when a particular fund anticipates making a distribution by checking its website periodically. Also make a note of the “record date” — investors who own fund shares on that date will participate in the distribution.

Invest in tax-efficient funds

Actively managed funds tend to be less tax efficient. They buy and sell securities more frequently, generating a greater amount of capital gain, much of it short-term gain taxable at ordinary income rates rather than the lower, long-term capital gains rates.

Consider investing in tax-efficient funds instead. For example, index funds generally have lower turnover rates. And “passively managed” funds (sometimes described as “tax managed” funds) are designed to minimize taxable distributions.

Another option is exchange-traded funds (ETFs). Unlike mutual funds, which generally redeem shares by selling securities, ETFs are often able to redeem securities “in kind” — that is, to swap them for other securities. This limits an ETF’s recognition of capital gains, making it more tax efficient.

This isn’t to say that tax-inefficient funds don’t have a place in your portfolio. In some cases, actively managed funds may offer benefits, such as above-market returns, that outweigh their tax costs.

Watch out for reinvested distributions

Many investors elect to have their distributions automatically reinvested in their funds. Be aware that those distributions are taxable regardless of whether they’re reinvested or paid out in cash.

Reinvested distributions increase your tax basis in a fund, so track your basis carefully. If you fail to account for these distributions, you’ll end up paying tax on them twice — once when they’re paid and again when you sell your shares in the fund.

Fortunately, under current rules, mutual fund companies are required to track your basis for you. But you still may need to track your basis in funds you owned before 2012 when this requirement took effect, or if you purchased units in the fund outside of the current broker holding your units.

Do your due

Tax considerations should never be the primary driver of your investment decisions. Yet it’s important to do your due diligence on the potential tax consequences of funds you’re considering — particularly for your taxable accounts.

Sidebar: Directing tax-inefficient funds into nontaxable accounts

If you invest in actively managed or other tax-inefficient funds, ideally you should put these holdings in nontaxable accounts, such as a traditional IRA or 401(k). Because earnings in these accounts are tax-deferred, distributions from funds they hold won’t have any tax consequences until you withdraw them. And if the funds are held in a Roth account, those distributions will escape taxation altogether.

(IMFS LLC, 1007 Chestnut Street, Newton, MA 02464
(781) 999-4343 )

Bookmark and Share | Share your Comments

Comments :
Post a new message

In this Issue
Celebrate Diwali With DAWN Worldwide

DAWN World Wide is organizing their annual fundraising dinner gala on 4th November 2017 at Belmont Center, Belmont, MA. It will be a night full of great entertainment, food and the proceeds from the night will support a greater cause.

Celebrate Diwali With DAWN Worldwide
Sindhi Association Diwali Event

The Sindhi Association of New England celebrated Diwali at the Woburn Hilton on Sunday October 29. The event was attended by more than 100 people. The event was sponsored by Motwane Foundation and Kay Pee Jewelers and organized by Menka Jethra.

Sindhi Association Diwali Event
Anuradha Palakurthi And Bappi Da - An Electrifying Performance

It is not often that one gets to share the stage with a maestro like Bappi Lahiri whose has produced hits for decades. Boston’s nightingale, Anuradha Palakurthi shone brightly on the stage belting out several of Bappi Da’s hit number and showed she could her own even with the maesto.

Anuradha Palakurthi And Bappi Da - An Electrifying Performance
Sudha Lakshmi Rao In Kentucky

Sudha Lakshmi Rao will be at Bluegrass Community and Technical College to raise funds for the Swarnamukhi Gopal Rao Scholarship for underrepresented students in applied science.

Sudha Lakshmi Rao In Kentucky
Arangetram: Bhairavi Chandrashekar

by Anuradha Annaswamy
On October 1, 2017, on a beautiful New England day, Bhairavi Chandrashekar brought the exquisite 2000 year-old art form of Bharatanatyam to life, in Newton South High School, Newton, MA in her debut performance, Arangetram, the ascending of the stage.

Arangetram: Bhairavi Chandrashekar

You may also access this article through our web-site http://www.lokvani.com/

Home | About Us | Contact Us | Copyrights Help