Market Minute - November 9, 2017
by Scott Rosenquist, CFA
Capital Gain Distributions
Mutual fund companies are starting to release their estimates for 2017 capital gains distributions. What do investors need to know about these distributions?
To start, what are capital gains distributions?
When a mutual fund sells a stock or bond for a gain, those realized gains are required to be paid each year to shareholders in the form of a distribution, typically toward the end of the year. They can be classified as long or short term depending on how long the fund held the position (under one year considered short-term). The distribution can be expressed as a percentage of the net asset of the fund (NAV). For example, a fund with a NAV of $10.00 that pays out $1.00 in capital gains will have a 10% distribution. Distributions above 10% are considered high.
The distributions received by the shareholder are taxed at their personal tax rates for capital gains. Taxes are owed if the distribution is received in cash or if it’s reinvested back into the fund. This does not apply to funds held in a tax advantaged account such as an IRA or 401(k).
Since the Great Recession, equity markets have had strong performance leaving many funds with imbedded gains. Taxable gains are a part of investing but there are some strategies that can help minimize potential tax effects such as tax loss harvesting. Mutual fund managers can use losses in their portfolio to offset gains although losses may be harder to come by with the strong market performance over the past several years. This same strategy can be applied by investors seeking to offset gains in their own taxable accounts.
If you have any questions on this topic, please reach out to your Relationship Manager.
Vantage Financial Partners and its agents are not tax advisors or accountants. We strongly encourage you review your tax situation, opportunities and liabilities with your tax advisor before making any changes. This article is not intended as tax advice. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Investments carry risk of loss including loss of principal. Past performance is never a guarantee of future results.