Mutual fund
investors (excluding qualifying retirement plans) are taxed based on activities
within each fund. If a fund investment generates taxable income or the fund
sells one of its investments, the income or gain must be passed through to the
shareholders. The taxable event occurs on the date the proceeds are distributed
to the shareholders, who then owe tax on their individual allocations.
If you buy
mutual fund shares toward the end of the year, your cost may include the value
of undistributed earnings that have previously accrued within the fund. If the
fund then distributes those earnings at year-end, you'll pay tax on your share
even though you paid for the built-up earnings when you bought the shares and
thus realized no profit. Additionally, if the fund sold investments during the
year at a profit, you'll be taxed on your share of its year-end distribution of
the gain, even if you didn't own the fund at the time the investments were
sold.
Therefore, if
you're considering buying a mutual fund late in the year, ask if it's going to
make a large year-end distribution, and if so, buy after the distribution is
completed. Conversely, if you're selling appreciated shares that you've held
for over a year, do so before a scheduled distribution, to ensure that your
entire profit will be treated as long-term capital gain.
If you're considering buying or selling mutual funds
and would like more information about the tax effects, give us a call at (518) 798-3330.
