The Wall Street Journal notes 2007 may turn out to be the year of the biggest taxable fund distributions in history - eclipsing even 2000. In addition to explaining why this year may be the worst ever, the article notes some perennial tips to minimize the tax bite:
Consider index funds or exchange-traded funds. Broad-based index funds, which track benchmarks like the Standard & Poor's 500-stock index, rarely pass out capital gains because they don't trade much. For the most part, they vary the securities they own only when companies are added to or subtracted from their benchmarks.
Broad-based ETFs can do index funds one better. They have a special way of creating and eliminating fund shares that makes distributions even rarer.
Check out after-tax returns. The Securities and Exchange Commission requires funds to publish after-tax returns, which assume investors pay the highest applicable tax rate on dividend and capital gains. You may not actually have to pay the highest tax rate, but the figures are a good tool for comparing funds' track records.
Put active funds in your retirement account. If you are building a broad portfolio with several types of funds, consider keeping tax-friendly index funds in your taxable investment account and actively managed funds that trade more frequently in a 401(k) or individual retirement account.
Do some tax-loss selling. Remember how fund managers can use losses to offset capital gains? You can do the same thing. If you have fund shares or other investments that are worth less than you paid, you might "harvest" the losses by selling them."
We'd add our own MAXfunds tax tip that never seems to make the mainstream fund press: stop buying funds after they have posted big gains and focus on some out of favor categories that are sitting on tax losses from other investors' bad timing.
When investors buy the previous year's top performing funds, chances are that fund is going to pay a big taxable gain. Worse, this tax bomb often hits after the performance slips and investors leave, forcing the manager to make some sales to raise cash.
When investors buy a down-and-out-fund, the manager is already sitting on stocks that were bought at higher prices, and probably has realized a good deal of losses. The manager can use these losses to offset future gains. This is why your typical value fund has paid out higher distributions in recent years than many growth funds.
Of course the way this year is starting, investors might not have to worry about taxes at the end 2008 at all.
The Wall Street Journal notes 2007 may turn out to be the year of the biggest taxable fund distributions in history - eclipsing even 2000. In addition to explaining why this year may be the worst ever, the article notes some perennial tips to minimize the tax bite:
We'd add our own MAXfunds tax tip that never seems to make the mainstream fund press: stop buying funds after they have posted big gains and focus on some out of favor categories that are sitting on tax losses from other investors' bad timing.
When investors buy the previous year's top performing funds, chances are that fund is going to pay a big taxable gain. Worse, this tax bomb often hits after the performance slips and investors leave, forcing the manager to make some sales to raise cash.
When investors buy a down-and-out-fund, the manager is already sitting on stocks that were bought at higher prices, and probably has realized a good deal of losses. The manager can use these losses to offset future gains. This is why your typical value fund has paid out higher distributions in recent years than many growth funds.
Of course the way this year is starting, investors might not have to worry about taxes at the end 2008 at all.
LINK