Here is methods to put together for year-end mutual fund payouts


It was a stellar year for actively managed equity funds, with average growth of 21.1% through October, according to Morningstar.

However, year-end payouts could soon dampen double-digit returns and trigger tax bills for funds in broker accounts.

When a fund manager sells underlying assets at a profit with no losses to offset them, he must pass those profits along with dividend income to shareholders.

The payment is usually made once a year in December after the fund has announced an estimate in late October or early November.

While profits are not an issue with tax-deferred accounts like 401 (k) plans or individual retirement accounts, investors with mutual funds on brokerage accounts may owe levies on these payouts.

“When we do year-end tax planning for clients, it’s always a bit tricky,” said Andy Pratt, partner and director of investment strategy at The Burney Company in Reston, Virginia, ranked 38th on CNBC’s 2021 FA 100 .

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After receiving a mutual fund’s estimate, investors have until the date of record or the last day listed for a payout to make changes in ownership.

If there has been no growth, they could consider selling before the deadline and then buying again after the payout, said Jeremy Jones, chief investment officer at Richard C. Young & Co., of Wakefield, Rhode Island, No. 5 the FA 100 list.

However, if investors sell at a loss and buy back a “substantially identical” fund within 30 days, they may violate so-called wash sale rules and the IRS will not recognize the loss for tax purposes.

Selling valued funds is difficult because it also generates taxable profits and the profits can potentially be higher than the fund’s estimated payout.

Additionally, offloading assets to avoid a payoff may be inconsistent with a person’s investment plan.

Future purchases

Investors must also watch out for future mutual fund purchases, especially through year-end.

“If you buy the day before the listing date, you’ll get the tax hit,” said Michael Bisaro, president of StraightLine Group in Troy, Michigan, which ranks 92nd on the FA 100 list. “And you could have owned it for three days.”

After reviewing the estimated payout, investors who want to avoid additional levies can buy a mutual fund after the registration date or keep the fund in a tax-friendly account.

If you buy the day before the deadline, you will get the tax hit. And you might have owned it for three days.

Michael Bisaro

President of the StraightLine Group

Harvest tax losses

While advisors typically seek price losses in the stock markets to offset gains by selling lost assets through what is known as tax loss harvesting, continued growth has made this strategy difficult to implement.

“The stock market has not given us a lot of opportunity in recent years,” said Bisaro.

However, should there be a pullback by the end of the year, advisors might consider selling some assets depending on clients’ goals, he said.

In the meantime, investors expecting payouts can work with an advisor to try other year-end tax planning steps to lower the levy.

Be proactive

While it may be difficult for some investors to avoid this year’s tax collapse, advisors suggest a proactive approach for the future.

“It’s about being really transparent and knowing your capital gains situation year round,” said Pratt.

For example, many advisors pay attention to tax efficiency when building portfolios and opt for mutual funds with less turnover and fewer distributions. However, some taxable gains can still occur.

“We’re trying to make this a part of our communication from the start and all the while we’re working on redesigning it a bit,” said Bisaro.

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