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Capital Gains
Ready to buy a mutual fund? Buying now may increase your taxes!

Capital gains tax. A capital gain is when the fund manager sells a stock in the fund for a profit. The profit (gain) is distributed to the shareholders. The shareholders will have to pay taxes on the distribution. For example: you buy a mutual fund at $40 per share. The mutual fund distributes a $4 per share gain to its shareholders. The share price will drop by the distribution amount ($40 per share will drop to $36) and the shareholder pays tax on the $4 per share. If you purchase the fund before the distribution record date, you will pay taxes on the distribution as if you had the fund all year.

There is not a required month that all mutual funds must distribute their capital gains. However, most distribute their gains October through December. If you purchase shares in September and the funds distribution date is in October, you may end up paying capital gains on that fund for the entire tax year even though you had the fund only one month. What to do? Call or e-mail the fund company and ask for the distribution record date for that specific fund. Make sure you ask for the earliest date that you can purchase the shares without paying the capital gains for the current year. Keep in mind, if you are investing in a Roth IRA the capital gains may not matter because your withdrawals are tax free in this type of retirement account.

 


 

The Financial Ad Trader
The Financial Ad Trader



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