Many asset management firms have started to publish estimates for what their respective mutual funds may distribute to shareholders in short- and long-term capital gains. Moreover, early indication is that some firms will be paying out capital gains higher than recent years. As you may be aware, when a manager sells some of their holdings internally and realizes a gain they are required to pass this gain on to its shareholders. More specifically, by law and design, asset management firms are required to pay out 95% of their realized dividends and capital gains to shareholders on an annual basis. Many of these distributions will occur during November and December. Remember this is only relevant for taxable accounts; capital gain distributions are irrelevant in IRA’s or 401k’s.
Capital gain distributions are a double edged sword. The fact that a capital gain needs to be paid out means money has been made on the positions the manager has sold. The bad news – the taxman wants to be paid.
What can we do to minimize the effect of capital gain distributions:
We exercise care when buying funds at the end of the year to avoid paying tax on gains you didn’t earn, and in some cases hold off on making purchases.
We may sell a current investment before its ex-dividend date and purchase a replacement after the ex-dividend date.
Throughout the year we harvest tax losses, when available, to offset these end of the year gains.
As always, there is a balance to be struck between income tax and prudent investment management. Please feel free to contact us if you would like to discuss your personal situation.
This material is being provided for information purposes only and is not a complete description of all available data necessary for making an investment decision, nor is it a recommendation to buy or sell any investment. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, tax situation and time horizon before making any investment decision. Any opinions are those of [insert FA name] and not necessarily those of Raymond James. For any specific tax matters, consult a tax professional. C14-040561