Surprise taxes can feel like getting a lump of coal. Here is how to Mitigate Taxes On Sneaky Mutual Fund Distributions

Full Transcript:

Anthony: Okay Alex, so we are approaching year-end here and people don’t often realize that mutual funds can release big distributions towards the end of the year, which is taxable income even if they don’t sell.

Alex: Yeah, that’s right. So the way a mutual fund works, at a really high level is when they buy and sell securities within the mutual fund those gains are distributed to you “the investor” if there aren’t any losses to offset those gains which can be a bit frustrating for investors because they have a little bit less control over the Taxation and you know the ability to control that at year-end.

Anthony: So we’re specifically talking about a taxable investment account, not a retirement account. So what steps can people take to help avoid or minimize these taxes?

Alex: Well, the first thing you need to do is research and look up what the “expected mutual fund capital gain distribution is expected to be”. So, you know, one of the easiest ways to do this is you just kind of type in your mutual fund capital gain estimates 2020 into Google. Google knows a lot of stuff it’ll usually pull up what that estimate is going to be.

Anthony: Towards the end of the year.

Alex: Exactly. That’s really like the first step then the next step is to look at your personal holding of that investment to say. Okay. Do I have a gain or a loss in that investment? If you have a loss it can kind of be a slam dunk to sell. Realize that loss, you know kind of tax-loss harvesting and then avoid that Capital gain distribution that might be coming out.

If you have a gain position, right if you have a mutual fund where it’s grown in value and it’s in a gain position that requires a little bit more analysis because at that point what you want to do is figure out okay, is it more advantageous to me to hold on to my mutual fund receive the capital gain distribution that the company is going to spit out to me? Or is it better to sell my fund, you know, realizing some gains there, but then avoiding a possible bigger distribution from the company, right? So those are really the big steps there in you really have to look at both the estimate of what the company’s going to distribute and compare that to what your personal tax liability is on a mutual fund that you hold. The one thing I want to point out is if you do sell. If you do decide to sell your mutual fund before the distribution you want to make sure to sell before the “ex-dividend date” that’s a very important date.

Anthony: Timing is really important.

Alex: If you don’t, all this is fruitless, and you’ll still be getting that gain distribution.

Anthony: Yeah, and this can be a complex thing. If you’re not dealing with it every day. So definitely consult your Tax Advisor your financial advisor to be able to work through this. and the other part of it too is not just avoiding tax. But in a lot of cases if you sell something you still want to be able to participate maybe a in the market increasing if that does happen. So buying a substitute fund to participate in a recovery. Also, if you’re selling at a loss, not immediately buying that same fund back because there’s some final “wash sale rules” so so this can get very complicated quickly. We just wanted to give you the basics here. There is more that goes into it.

Make sure to consult your Tax Advisor your investment advisor as well. These are the types of things that we help people with to help them grow and protect their Investments, but also to save on the bottom line of taxes

If you’d like to talk with us go to our website Onedegreeadvisors.com. You can schedule a call with us there. We’d love to talk to you.

Let’s get to know you better. Schedule a complimentary call with an advisor here

More Reading: How should I Invest During Coronavirus: Should I Be Optimistic?

Disclaimer: One Degree Advisors does not provide tax or legal advice. This website has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax or legal advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.