Year-end mutual fund purchases

If you plan on buying mutual funds before the end of the year you may want to wait until January and avoid some taxable distributions.

When you buy a mutual fund any interest, dividends and capital gains earned by the fund is payable to you, the shareholder. These earnings must be paid out by the end of the year. Most equity funds wait until sometime in November or December to pay out distributions (bond mutual funds pay the interest monthly.) At the same time they are paid out the share price of the fund drops by a corresponding amount. So in essence you are not gaining anything through these distributions. But if you hold the fund in a taxable account, you’ve incurred taxable income. Therefore you may want to avoid buying shares of a mutual fund and having a distribution made a few days or weeks later.

Many mutual funds will post their estimated distributions on their website along with the date of the distribution (look for the “Tax Center” or other references to “year-end distributions”.) If the information isn’t there now keep checking back, or call the company. To avoid the income you will want to buy shares of the fund after the “ex-dividend” date. Remember, this is only an issue in taxable investment accounts. In tax-deferred account, such as IRAs, one does not pay income tax on distributions as they are incurred, only at the time a withdrawal is made.