Mutual funds: Handle with care at year end

This article organizes the original guidance on mutual funds: handle with care at year end into clear sections for easier reading and reference.

Overview

This opening section presents the main context from the original post.

As we approach the end of 2018, it’s a good idea to review the mutual fund holdings in your taxable accounts and take steps to avoid potential tax traps. Here are some tips:

Avoid surprise capital gains

This section keeps the original guidance focused on avoid surprise capital gains.

Unlike with stocks, you cannot avoid capital gains on mutual funds simply by holding on to the shares. Near the end of the year, funds typically distribute all or most of their net realized capital gains to investors.

If you hold mutual funds in taxable accounts, these gains will be taxable to you regardless of whether you receive them in cash or reinvest them in the fund.

For each fund, find out how large these distributions will be and get a breakdown of long-term vs. short-term gains. If the tax impact will be significant, consider strategies to offset the gain. For example, you could sell other investments at a loss.

Buyer beware

This section keeps the original guidance focused on buyer beware.

Avoid buying into a mutual fund shortly before it distributes capital gains and dividends for the year. There’s a common misconception that investing in a mutual fund just before the ex-dividend date (the date by which you must own shares to qualify for a distribution) is like getting free money.

In reality, the value of your shares is immediately reduced by the amount of the distribution. So you will owe taxes on the gain without actually making a profit.

Seller beware

This section keeps the original guidance focused on seller beware.

If you plan to sell mutual fund shares that have appreciated in value, consider waiting until just after year end so you can defer the gain until 2019—unless you expect to be subject to a higher rate next year. In that scenario, you would likely be better off recognizing the gain and paying the tax this year.

When you do sell shares, keep in mind that, if you bought them over time, each block will have a different holding period and cost basis. To reduce your tax liability, it is possible to select shares for sale that have higher cost bases and longer holding periods, thereby minimizing your gain (or maximizing your loss) and avoiding higher-taxed short-term gains.

Think beyond just taxes

This section keeps the original guidance focused on think beyond just taxes.

Investment decisions should not be driven by tax considerations alone. For example, you need to keep in mind your overall financial goals and your risk tolerance.

But taxes are still an important factor to consider. Contact us to discuss these and other year-end strategies for minimizing the tax impact of your mutual fund holdings.

Related Resources

These resources connect the article topic with related Bowers service pages and approved professional reading.

• Tax Services
• Business Valuation
• Mergers & Acquisitions
• Bowers Updates
• Harvard Business Review
• Accounting Today

FAQ

The questions below summarize the main points already covered in the article.

What is the main focus of Mutual funds: Handle with care at year end?

The article focuses on mutual funds: handle with care at year end and organizes the original guidance into sections for easier review.

What topics does the article cover first?

The article begins with avoid surprise capital gains and then continues through the remaining points in the original post.

Which additional areas are included?

Additional sections include buyer beware, seller beware, think beyond just taxes.

Does the post include action items or reminders?

Yes. The original post includes listed items that have been kept in list format for easier scanning.

Was the original post wording changed?

The revision keeps the author wording and updates the structure so the post is easier to read online.