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The following articles were published in past editions of our
monthly newsletter.
Mutual Funds Increasing Taxable Distributions -- October 2006
Mutual funds typically pay their net capital gains at the end of every year.
These profits from their trades for the year must be shared by all mutual
fund holders even if those investors did not sell their holdings.
This year numerous fund managers and analysts predict that year end capital
gains and income distributions will be higher than last year’s highest since
2000. In the recent past, most mutual funds had losses from the market drop
from 2000 to 2002 to offset any gains. However, those tax losses have been
used at many funds.
If you invest in a mutual fund now, you may incur a tax obligation for that
payment if you own the fund in a taxable account. Before investing in a
mutual fund, check when it will make its distribution payment. To avoid the
tax obligation, you should buy the fund in a tax deferred account, or wait
until after this year’s payment before purchasing the fund.
We also suggest that you avoid mutual funds and invest in ETFs although, be
aware that you will pay trading costs for ETFs which you may not incur with
many mutual funds. ETFs usually have very small distributions relative to
actively managed mutual funds, so you can avoid most capital gains
distributions.
Mutual fund investors pay higher taxes -- September 2006
A study conducted by Lipper Inc. calculated that mutual fund investors paid
an estimated $15.2 billion in taxes last year. This is 58% higher than last
year as managers have not been able to offset their gains with tax losses
from the 2001 and 2002 bear market. These taxes (they apply to funds held
outside of tax deferred retirement plans) are not from investors buying or
selling, but instead are caused by the portfolio managers who must must
distribute capital gains to shareholders.
Tom Roseen, a senior research analyst at Lipper and author of the study,
expects the average tax drag to approach fund expense levels this year or
about 1% of assets. He expects them to reach 1.5% next year.
Of the $15.2 billion in taxes, $1.72 billion were short term capital gains,
and $6.34 billion were long term capital gains. $7.17 billion are dividends.
Long term capital gains and dividends are taxed at the 15% rate while short
term capital gains are at ordinary rates.
Investors can avoid these higher taxes by investing in tax deferred plans or
with Exchange Traded Funds. ETFs carry reduced capital gains compared with
mutual funds when you buy and hold them. Capital gains or losses are
triggered when you buy or sell the ETF at a gain or loss, but not when other
investors buy and sell their shares as can happen with mutual funds.
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