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Tuesday, October 24, 2006

Delaying taxes on mutual funds

With the Dow Jones average rallying past 12,000 points, many investors, who were previously talking about real estate prices, are now busy talking about stocks and mutual funds. I do not own any real estate investments and have always been interested in stocks and mutual funds, so it's finally good to see that stock market has been going up nicely recently.

I have been planning to buy mutual funds in a taxable account from the Dodge and Cox mutual fund family but because of laziness and lack of money, had been delaying it. Now, however, I have to delay buying it until late December or early January because in the last quarter of the year, most mutual funds make capital gain distributions.

By law, mutual funds have to distribute any capital gains (difference between sale price and purchase price) they make during the tax year to its shareholders and this distribution typically happens in Nov-Jan period. So if you purchase a mutual fund now, you may end up getting some capital gains distributions. This may not sound bad but the problem is that you end paying tax on it (typically as a short term gain if you held the fund for a short period of time only) to the IRS when filing your taxes. In addition, the capital gains directly reduce the Net Asset Value of your mutual fund as well as its share price. So it's always better to avoid buying mutual funds later in the year and wait until after they have made their capital gains distributions. Most fund family can let you know ahead of time when they plan to make distributions in their different mutual funds; this info can be obtained from their Web site or by contacting them.

For now, I will just buy some mutual funds in my IRA account because I don't have to worry about capital gains distributions since the taxes are deferred until later.

posted by Ruby @ 9:47 AM

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