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There may be some pain ahead for mutual fund investors in the form of capital gains tax. Even if the value of their investments declines during this year’s market turmoil, they can still receive capital gains distributions from actively managed funds. In a recent report, Morningstar research analyst Stephen Welch wrote, “Many managers have had to recognize some of the benefits of meeting redemptions as a result of sell-off-triggered outflows and investors’ tendency to swap actively managed stock funds for exchange-traded funds.” , which is then distributed to remaining shareholders. If the money is held in a taxable account, those distributions are subject to taxes. “This means that funds that have suffered a severe downturn this year can still distribute capital gains to investors,” Welch said. Studying multiple funds with different distributions in. Estimated distributions range from 0% – 1% of net asset value in the Royce Global Financial Services Fund to as high as 88% of NAV in the Delaware Permanent Equity Income Fund. Estimates are still subject to revision, payouts between the end of November and the end of the year. Here’s a sample Morningstar found. Of the firms mentioned here, several AllianceBernstein funds are on track to distribute between 6 percent and 12 percent, while Ariel’s American Strategies fund pays 7 percent to 11 percent of the fund’s net asset value (NAV). Many Fidelity Funds pay more than 5%, his SAI Real Estate Fund can distribute 19% to Many Franklin Templeton funds make double-digit distributions — some as high as 4% and others as low as 15%. Meanwhile, a few Janus Henderson funds allocate 5% to 10% of assets. John Hancock pays double-digit capital gains distributions on many of his funds. JPMorgan has several funds with payouts ranging from high single digits to low-double digits and one, its US Large Cap Core Plus Fund, is expected to distribute 24%. About a dozen Nuven funds offer capital gains distributions of 5% to 10%, while about twice as many T. Rowe value funds yield between 4% and 21%. Finally, many TIAA-CREF funds are spread between 6% and 12%. The CapGainsValet website offers a free lookup of simplified capital gains estimates for large mutual fund firms. Should you stay or should you go? First, find out which accounts are affected — only those in taxable accounts, not those in 401(k)s or IRAs, are taxed on distributions. If held in a taxable account, assets held for more than a year are taxed at 0%, 15% or 20% – depending on your income. If they are held for less than one year, they will be treated as regular income. However, investment fundamentals should always be at the forefront of your decision to stick with or get out of your mutual funds, says Christine Benz, director of personal finance at Morningstar. If you believe in investing, stick with it. But, if you’re on the fence about holdings, see if you can find a hedge fund with similar exposure, she said. Passively managed funds may have spreads, but they tend to be lower than actively managed funds, Benz points out. But, if you decide to sell, first check to see how much the place appreciated after you bought it, she said. “You can eliminate the distribution that comes with selling, but you can open up your own tax account if the property has appreciated since you bought it,” Benz said. There are different ways to determine your cost basis, which is used to determine your tax liability. The cost basis is essentially the amount you paid for your mutual fund shares, less any taxable capital gains or dividends previously reinvested. The default option is Average Cost Basis. If you buy shares at different intervals, this method covers the value of all the purchases together. Benz recommends another way – a special stock identification system, which allows you to choose which ones you want to sell. Therefore, she explains, you can choose to sell a new position that is much less appreciated than the old one. Note that you cannot select this option if you used the average cost basis in the past. It’s also important to know how long you’ve held the property before you sell it so you can determine whether you’ll pay the highest short-term capital gains tax or long-term payment, says Philip Mitchell, president of Croron, a certified public accountant. & Mitchell Asset Management in Grand Rapids, Michigan, says there is an additional 3.8% net investment income tax for those earning more than $250,000 or those earning $200,000 for singles. Another thing to keep in mind is that the higher the income from the investment sale, the more Medicare Part B you pay, which is based on your adjusted gross income, said Mitchell, a member of the Personal Finance Planning Executive Committee. International Association of Certified Professional Accountants. It could also affect the amount of tax you pay on any Social Security benefits, he added. “Start adding up the pros and cons,” Mitchell said. “It’s not always clear cut.” If you decide to sell after you’ve settled your tax liability, make sure you do it before the record date, which is the date you must own the stock to receive the distribution, he said. You can also look at your portfolio as a whole and see if there is any tax loss harvesting that could be done elsewhere, offsetting any losses this year. New Investments Those considering adding new investments to a taxable account may want to consider passively managed funds, such as index funds or exchange-traded funds, Benz said. “Most actively managed funds are not ideal for a taxable account,” she says. “You lose control of your tax haven.”
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