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Five Mutual Fund Tax Rules

- Alan Lavine and Gail Liberman

It could be time to consider tax changes in your mutual fund investments. But always check with your accountant or financial advisor first.

Here are the general year-end rules of thumb:

  • Don't buy a new taxable fund unless you check with the fund first. Most funds distribute capital gains in December. If you buy a fund now, you risk paying capital gains taxes on your prorated share of the fund's profits for the entire year.

    If you buy a new fund, make sure it's a fund that has capital losses on its trades for the year. Those losses can be carried forward next year. This way, any capital gains that fund experiences are reduced by the prior year's losses.

    So where do you look for funds with capital losses? Check into funds with good long-term track records that invest in the following types of assets.ye Large company growth stock funds, on average, are down -3 percent or more this year.

  • Technology, precious metals and utility stock funds have declined at double-digit rates this year.

  • Consider mutual fund swaps if you want to write off losses. Say you have a stock fund that lost money this year: Sell the fund, wait 31 days, then buy that same fund back. This way, you can write of the loss. Beware that the IRS disallows this tactic if you fail to wait more than one month to buy back the fund.

    Another option: Consider selling your fund and buying a similar fund immediately and write off the loss.

    However, some experts warn that you should avoid these tactics on exchange traded funds that represent the S&P 500 or other stock market indexes if they're with different companies. With an exchange traded fund, you own shares in a basket of stocks, traded on a stock exchange. The IRS, some believe, could disallow loss write-offs on such an exchange traded fund swap on grounds that you're buying and selling the same underlying investments.

  • Consider keeping bond mutual funds that pay interest in tax-deferred retirement savings accounts. This way, you should not pay taxes on the income until you retire.

  • Keep mutual funds that don't distribute income in taxable accounts.

  • Place tax-managed stock funds in taxable accounts. Mutual fund groups, like Vanguard, offer low-cost stock funds that keep taxable distributions to a minimum.

  • If you are in a high tax-bracket, consider tax-free municipal bonds. This way, you won't pay taxes on the income.


    Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books). Al and Gail's new book is Rags to Retirement, (Alpha Books).

    To read more columns, please visit the column archive.

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