How to Avoid Overpaying Tax on Mutual Funds
Mutual funds can be
Investing in mutual funds is a way for investors to pool security ownership with other investors. But when you’re considering taking advantage of the benefits of mutual funds, make sure you don’t overpay in taxes. Here are certain funds to consider and behavior strategies to follow that will ensure you maintain tax-efficient investments:
First, let’s look at index funds. This type of mutual fund passively matches or tracks a market fund, such as the S&P 500. But unlike actively managed funds,
An exchange-traded fund (ETF) is a type of index fund which trades on a major stock market, like the New York Stock Exchange. ETFs are generally investments with lower risk and lower
Another type of tax-efficient mutual fund is a tax-managed fund. These funds help reduce the amount of capital gains tax you pay by harvesting losses to offset gains. You see capital gains either by selling shares or by receiving embedded gains, which happen when the fund sees a gain from the sale of a share and that gain is passed to you as
Basically, you control when you realize your capital gains. And in some instances, thesefunds may have early-redemption fees that deter withdrawals which could forcemanagers to sell and thus see capital gains.
The last type of investment worth mentioning is a separately managed account (SMA). These accounts differ from mutual funds in that you have an account manager who directs securities that you own on your behalf. SMAs can help you avoid turnover and you may see opportunities to take advantage of tax swaps. Just keep in mind that the fees on SMAs could be a bit higher than mutual funds.
You want to ensure that your investment behavior actually takes advantage of the tax benefits you can see from the above types of funds. Many investors don’t fully understand the tax implications of mutual funds, The New York Times notes.
First, try to avoid large lump-sum distributions. For tax-deferred accounts, like retirement accounts, you’ll see a big tax bill if you opt for one large lump-sum withdrawal. Instead, try rolling the money over or spreading out the distributions over several years.
When applicable, try tax loss harvesting, or tax swaps. This strategy allows you to use capital losses (when you sell a fund for less than you bought it) to offset any capital gains. This can help you reduce or manage your tax bill from capital gains.
Keeping dividend payout timing in mind is another important strategy to manage taxes. The capital gains you accrue throughout the year are paid out
When you’re ready to look at your investment portfolio with an experienced financial professional, Provident CPA andBusiness Advisors is here to help. We ensure you pay the least tax legally possible and help you create a diverse and balanced investment portfolio. Get in touch with our team today to learn about how we help our clients create investment strategies that work.
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