Savvy Mutual Fund Tax Moves

Year-end is always hectic, but it’s well worth taking the time to consider a few investment moves that could have positive tax ramifications.

First, think about tax-loss harvesting, or selling some of your losing positions at a loss in order to offset capital gains elsewhere in your portfolio. Also you need to manage mutual fund distributions. Remember, mutual funds must pay out at least 90% of their net capital gains and income to shareholders every year. Therefore, funds typically issue shareholder distributions toward the end of the year. If you’ve registered a loss in a fund that’s set to make a distribution, you might consider selling it before the distribution is issued. Not only can you use the loss to offset other gains, but you avoid taxes on the distribution.

Similarly, you might consider putting off until next year the purchase of a new fund poised to make a distribution. That is, if you buy the fund now, you will owe taxes on any distributions you receive by the end of year even though you did not participate in the fund’s growth over the course to the year.

You might think that the market’s negative performance this year would mean a lack of gains to distribute. However, it’s always worth checking to be sure. Your fund company's website should have estimates for year-end distributions.

However, if you own mutual funds in your 401(k), IRA or other tax-advantaged retirement account, you don't have to worry about these fund distributions because they will not be taxed until you begin withdrawing your money in retirement.