Dealing with mutual fund yearly capital gains distributions. That pesky tax.

As many of you know I work as closely as possible with my clients to balance out the amount of taxes they pay over their retirement years. In retirement taxes are an expense. The more taxes you pay the less money you put in your pocket.

The more taxes you pay, in no way signifies you’re rich. It just signifies that you voluntarily like to pay a lot of taxes and have less money to spend. That’s all. Millionaire’s and Billionaires don’t work hard so that they can maximize their taxes, and neither should you.

Here’s an issue that I have been seeing with those that aren’t my clients that hold a lot of investments outside of IRA type accounts. The problem is with Mutual Fund Capital Gains Distributions which happens towards the end of every year. These distributions will catch you off guard and lead you to a tax surprise come April 15th.

Mutual funds must make yearly distributions of embedded capital gains. These distributions comes from the buying and selling that goes on inside a fund. It also comes because investors want their money, so the fund is forced to sell to give them their money.

Every fund will distribute different amounts because it is dependent on various factors. This has always been a factor, but it’s a bigger issue when the stock market is performing well. In the years prior, there was a lot of losses mutual funds were carrying, so the issue was tamed. All those loses are gone now, so you have a problem.

Now here is the myth. Investors actually think it means that they made money. Your distribution does not mean you made money. The value of the investment will adjust DOWN by the amount of the capital gain distribution you are paying taxes on. For example, let’s say you have XYZ fund which is worth $10,000 and your capital gains distributions were $2,000 of which you paid taxes on. When you look at the value of XYZ fund it will be worth $10,000 if you reinvested those gains. If you received the gains in cash, the value on your statement will say $8,000.

When you work with someone like me, we are able to utilize “planning” to make sure that we minimize this issue and provide a very tax efficient retirement. Remember, less taxes you pay the more money you put in your pocket.

Lets chat about your personal goals