Be careful about mutual fund investing near the end of the year.
Let’s say you’re thinking about investing a significant amount of money in your favorite mutual fund over the next few weeks. Before you act, keep in mind that this is the time of year when many funds typically distribute their year-end capital distributions.
These payouts typically are taxable—unless you’re investing through an individual retirement account, a 401 (k) plan or some other type of tax-favored account.
Find out whether the fund is planning a year-end payout. If so, try to find out how much and how that payout might affect your taxes.
After crunching the numbers, some taxpayers may discover that it might be smart in certain circumstances to postpone buying shares in that fund until after the date to qualify for the distribution. Otherwise, it can be like getting back your own money and having to pay taxes on it.
There are a few other facts about mutual funds that confuse many people. For example, the distributions from funds are not the same as the total return of the fund. Many people confuse the capital gains distribution the same as the profit they made on the fund which is rarely the case. Contact a good RIA with the soul of a teacher who will explain it to you.