Watch Out For Tax Traps With Year-End Mutual Fund Purchases

As the year winds down to a close, be extra careful when making new mutual fund purchases. You could find yourself buying a fund only to immediately receive a capital gains distribution. You can avoid making this mistake by just checking a few pieces of information readily available to investors.

Your best tools are those available to you for free, the finance websites such as Morningstar, Yahoo! Finance, Google Finance, and many others. Take the time to look at the fund information for the fund you are considering to purchase and pay close attention to past capital distribution dates and estimates for distributions to come. Not all funds have these distributions, but many funds that feature small to mid-cap companies are notorious for handing out capital gains. If you see that your prospective fund does have a distribution coming, simply wait until after the ex-dividend date. After this date, the distributions were processed and the price of the fund now reflects the distribution being made.

Keep in mind, these distributions really only affect taxable accounts. Tax deferred accounts such as IRAs or 401(k)s simply defer the taxes until you take a distribution, thus any capital gains that are distributed are also deferred.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

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