Hefty Fund Payouts Trigger Big Tax Hit

Investors have been socked with sizable taxable distributions in recent years, and 2018 will be no different.

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This can be a taxing time of year for mutual fund investors. Toward the end of each year, mutual funds generally distribute to shareholders their net capital gains, or profits on the sale of fund holdings. If you hold funds in a taxable account, you will owe tax on those distributions—even if you reinvest them back in the fund. And if you buy into a fund just before a distribution, you will owe tax on gains you didn’t even receive.

Many funds have socked investors with sizable taxable distributions in recent years—and this year is likely to bring more of the same, fund analysts say. Two factors are supersizing the payouts. Thanks to years of strong stock market performance, many fund portfolios are full of appreciated holdings. What’s more, as the popularity of index-tracking funds soars, investors have been yanking money from actively managed funds. That can force fund managers to sell holdings to raise cash to meet investor redemptions, realizing gains that they must distribute to shareholders. Even worse, those gains are distributed over a smaller number of shareholders, increasing the tax pain for each investor remaining in the fund.

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Eleanor Laise
Senior Editor, Kiplinger's Retirement Report
Laise covers retirement issues ranging from income investing and pension plans to long-term care and estate planning. She joined Kiplinger in 2011 from the Wall Street Journal, where as a staff reporter she covered mutual funds, retirement plans and other personal finance topics. Laise was previously a senior writer at SmartMoney magazine. She started her journalism career at Bloomberg Personal Finance magazine and holds a BA in English from Columbia University.