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It’s a taxing time of year for mutual fund shareholders

By Dian Vujovich

It’s that time of year again. No, not the pre- holidays but the pre-tax days.


While the markets have barreled through one heck of a top performance year -so far—at some point in time investment gains come face to face with taxes and the long arm of Uncle Sam.  For mutual fund shareholders this is an annual affair, unless the funds are in a qualified retirement account.


Unlike say an investment into the stock of a company where the buying and selling of those shares are all under your control, mutual fund shareholders don’t have that liberty because it’s a fund’s portfolio manager(s) who rule the buying and selling roost of their  portfolio’s holdings. Combine their activity with the rules governing mutual funds via the Investment Company Act of 1940 with the IRS and every year fund investors face income and capital gains distribution tax consequences.


If you’re wondering why things work like this it’s because mutual funds are required to distribute 90 percent or more of their net investment income to shareholders. Income that they’ve gotten from dividends, interest and the capital gains realized from selling securities in their portfolios. Plus, 98 percent of capital gains net income has to be distributed as well.


So, while having somebody else manage your money via mutual fund investing sounds like a nifty thing to do, and can be hugely rewarding,  it comes with a cost. But then again, what on Wall Street doesn’t?


Three other capital gains points to consider during this late- November and December season when most make their distributions known include:


1.Capital gains for mutual fund shareholders come in two flavors. One, is when they, the shareholder decides to sell or exchange their fund shares. As seasoned investors know, any gains made when that happens triggers a cap gains tax. If you’ve held those shares for longer than a year before selling, you’ll have a long-term tax deal with. It can range for 0 percent to 20 percent.


2.The capital gains that are realized by the fund and then passed on to you may be short- or long-term capital gains.


3. If you’re in the market for a new fund investment, make sure to not get all swept up in the excitement of this hot market and invest in a fund before you’ve checked out when its capital gains record date is. The last thing any fund investor wants to do now is to purchase shares of a high-flying fund only to be slapped with its 2013 tax consequences right out of the box.


Three examples of Fidelity funds with the largest estimated capital gains distributions, for example, include  the Fidelity Latin American fund (FLATX), it with distribute a gain of about 17% of its NAV, and the  Fidelity Trend (FTRNX) and the  and  Fidelity China Region (FHKCX). Both  will distribute capital gains of more than 11% of their NAVs, according to Morningstar.


There is much more to this topic than what I’ve mentioned. So because taxes and mutual fund investing can be complicated, make sure to work with your investment advisor or the fund family(ies) you’ve invested with to learn more and ease the pain taxes can sometimes inflict.

To read more articles, please visit the column archive.

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