Beware of Year-End Capital Gains Distributions

Beware of Year-End Capital Gains Distributions

Beware of Year-End Capital Gains Distributions

Ready to buy a mutual fund? STOP! Buying now may increase your taxes!

Yes, it is about that time for mutual fund capital gains distributions. A
capital gain is when the fund manager sells a stock in the fund for a
profit. The profit (gain) is then distributed to the shareholders. The
shareholders will have to pay taxes on the distribution. For example: you
buy a mutual fund at $40 per share. The mutual fund distributes a $4 per
share gain to its shareholders. The share price will drop by the
distribution amount ($40 per share will drop to $36), and the shareholder
pays tax on the $4 per share. If you purchase the fund before the
distribution record date, you will pay taxes on the distribution as if you
had the fund all year.

The Vanguard group recently issued a press release encouraging investors to consider the potential tax consequences of making large equity and balanced fund purchases prior to year-end 2000.

Most mutual funds distribute their capital gains in October. If you
purchase shares in September, you may end up paying capital gains on that
fund for the 2000 tax year even though you had the fund only a month.

What to do? Call or e-mail the fund company and ask for the distribution
record date for that specific fund. Make sure you ask for the earliest date
that you can purchase the shares without paying the capital gains for the
current year.

Keep in mind that if you are investing in a Roth IRA, the capital gains may not
matter because your withdrawals are tax-free in this type of retirement
account.

Alfred V. Scillitani is the author of Basic Investing Guide For The New Investor.