This is the time of year when many mutual funds and exchange traded funds are busy tallying up investment earnings for the year, in advance of making any needed distributions prior to the fund’s fiscal year end. The fiscal year end falls in November or December for many of these funds.
You may find it beneficial to do some research first before making any new or additional purchase for an investment that’s held in a taxable account. We recommend that you review the fund’s distribution history prior to making any new or additional purchase to avoid inadvertently picking up a potential taxable transaction.
Fund companies typically declare and schedule in advance the payout for any distribution. As an example, the fund company will typically declare that a specific type of distribution (i.e., income, dividend, short or long term capital gain) will be payable to shareholders of record as of December 1, 2013. Many fund companies will also disclose in advance the estimated amount of any distribution, along with the actual payment date.
Most fund companies and brokerage firms post this information on their respective websites. If you are not sure how to find it, just google the name of your investment holding. Then look for tax information or distribution information at the appropriate website.
You can frequently, although not always, sidestep picking up that potential tax liability by waiting to purchase the new or additional investment in the fund until after the shareholder of record date has passed. Waiting is not always failsafe, however, since some companies later determine they should have paid out a larger amount; hence, they may subsequently make a second distribution within a few days.
The same concern for picking up a potential tax liability from a distribution made late in the fiscal year is not present for those investments held in a tax deferred account, such as your 401(k) or IRA. That’s because there’s no tax liability triggered until you make an actual withdrawal from the account.
So investing a little time and research can help you avoid inadvertently triggering a taxable transaction for the calendar year. Do the research. Avoid the trap. It’s your money!