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Investment Planning |
Buying Mutual Funds at Year-End
If you're planning to buy a mutual fund between now and the end of the year, knowing the fund's distribution schedule can avoid paying extra taxes. Whenever you own a fund that distributes a dividend or capital gain, as a shareholder you'll have to pay tax on the distribution. When a distribution from a mutual fund occurs, the net asset value of your fund drops by the amount of the distribution. The most popular time for a mutual fund to make a distribution is at year-end, although anytime during the year is fair game for distributions.
If you own shares of a fund on the record date, you'll be stuck with any distribution the fund makes to shareholders. The payable date is the date on which the distribution will actually be paid out to all shareholders of record. The reinvest date is the date that the distribution will be reinvested in more shares of the stock if you've chosen dividend reinvestment. If you choose not to reinvest dividends in more shares of the fund, the dividend and capital gain distribution will be paid to you in cash.
Here's an example. Let's say you bought Fund V on December 8 when the price per share was $25. On December 13, the fund distributes a capital gain of $2 per share to all shareholders who owned the fund on December 9. On December 13, the price per share will drop by $2, and you'll have to report the gain on your tax return -- a pretty bad result for the fact that you didn't want the $2 per share back, you wanted to keep it in the fund, and you certainly didn't want to get taxed on it.
Remember, even if you invest your dividends and capital gain distribution in more shares of the fund, you're still liable for paying tax on the distribution if the transaction occurs in a taxable (non-IRA) account. With a little planning, you can avoid being a shareholder of record -- and avoid unnecessary taxes. Before you're ready to make a mutual fund purchase, especially in the last two months of the year when many fund companies make distributions, find out if and when a distribution will occur. If you buy the fund after the record date, you're safe from that round of taxable distributions. Of course if you buy the fund in a retirement account, such as an IRA or 401(k), you won't be taxed on any distributions until you make a withdrawal from the account. Call the fund company to find out the distribution schedule, or look on the fund company's web site when planning investment purchases late in the year.
Tips Disclaimer
These tips contain information that may change over time as a result of new tax legislation. Although we make efforts to keep this information current, you should check with your tax advisor before taking action based upon any information contained in these tips.