Look Out For End of the Year Surprises

| December 13, 2017
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Are you watching the estimated mutual fund distributions between now and the end of the year?  If you’re wondering what we’re talking about, this post is for you.  Sometimes funds have gains or income that have built up throughout the year from buying and selling securities that they hold.  They can then decide to distribute those gains to the fund holders, which would be you.  This isn’t a big deal for nontaxable or tax-deferred accounts such as IRA accounts, but can be important when you have a taxable account.  The reason this can be a big deal with taxable accounts is that you ultimately end up paying taxes on the distributions that you get from the funds in your taxable accounts. 

There are different types of distributions which can each have different tax consequences.  The three main possible components of fund distributions at the end of the year are investment income, short term capital gains, and long term capital gains.  Fund distributions can be made up of one or more of those components.  Some funds are more tax efficient than others.  It is very possible for some funds to have no extra distributions throughout the year as well.  These distributions are not the quarterly or monthly income you receive on a regular basis.  These are those extra distributions that typically occur between November and December that can vary each year.

While distributions may not have large consequences for a smaller account, they could potentially affect your tax liability if you have a larger account or if you just happen to receive a large distribution.  If you already have a significant tax liability for the year, capital gain distributions could increase it even more.  It’s important to keep an eye out on the estimated capital gain distribution alerts from funds that you hold, so that you’re aware of when they’re coming and how much to expect.  Some funds will send out e-mails to their mailing lists about the distributions, or you can always check their website.  Remember that the estimates are normally just that, estimates.  The actual distribution could be more or less. 

It’s important to stay on top of your investments throughout the entire year.  A good financial advisor should do this for you in order to minimize the tax impact of these distributions.  Hopefully this blog post gave you a basic understanding of the end of the year distributions that some funds make.  Feel free to contact our office if you have any questions about your particular situation.

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