Subscribe to this BlogFund investors get a tax break
If you held on to your fund portfolio through the market downturn, you have plenty of reason to smile this year. The average large-cap stock fund has rebounded some 23% so far this year. And some have done far better — small growth funds are ahead 30%, while Latin America stock funds have zoomed nearly 50%.
And best of all, you will probably pay little or no taxes on those gains.
That’s the assessment of Tom Roseen, a senior research analyst at Lipper, who tracks mutual fund taxes.Because of the gigantic losses suffered by funds last year — the typical equity portfolio plunged 40% — most have huge tax loss carryforwards, which can be used to offset your gains. As Roseen said in a recent interview, “Those losses mean that despite the huge market run-up, most shareholders will enjoy a nice tax holiday this year.”
Fund families are starting to post their estimated taxable distributions on their websites, though most won’t have the numbers available until November or December, when distributions are generally made. The American Funds family, for one, has announced that it expects to pay zero or nominal capital gains distributions this year. And Royce Funds has already released capital gains estimates for individual funds. The highest payout will be just $0.42 a share for Royce Focus Value (RYFVX), which works out to less than 3% of net asset value.
Still, some shareholders may get a bit of nick, Roseen says, particularly those who hold leveraged exchange traded funds — ETFs which seek to deliver twice or more times the return, or the inverse, of a particular benchmark. If your ETF bet the right way, you may have racked up big gains, which will be taxed as income. And bond investors, who didn’t suffer the big losses of stock funds shareholders last year, may also see a tax bill.
There is a downside of the market rally, however: The tax holiday may not continue into 2010. “After last year’s losses, I though we’d have a tax holiday for the next two to four years,” says Roseen. “But because of the rapid recovery, we could have wiped it out entirely.”
Are these distributions taxed as capital gains if they are immediately reinvested in the mutual fund?
I guess that some people reading this article don't understand that mutual fund companies are required to distribute gains in the fund value every year in the form of 'capital gains distributions'. These are paid in an amount per share in the fund and are taxable capital gains.
In 2007 when the market went up dramatically many fund shareholders were hit with very large tax bills, so it is a relief that this will not happen after the major rise in fund values this year.
This will be a major tax avoidance for individuals who have large mutual fund holdings such as retirees. Thanks for the useful, informative article.
How does this tax break affect a withdrawal from your IRA/Rollover IRA to use the withdrawal monies to buy a primary resendential home/condo?
My age allows me to withdraw with out a penalty however I am concerned about the taxes.
Thank you.
This should have no effect, positive or negative, on any taxes you might have to pay on withdrawals from your IRA. — Editor
This is not a tax break, I had large cap funds and they dropped about 30-35% so even though they come back 23% I'm still down 7-12%. the Fund of course took their MER regardless of performance.
Does anyone know if you have to sell the fund to get the tax break?
You don't have to sell the fund. The taxes that this post refers to are those that mutual fund shareholders would have to pay simply as a result of holding the fund. — Editor
47% of people pay no, zero, zip, zilch taxes anyway… Plus, in order to have all these loss carry overs, those funds lost a butt load of money. Bitter sweet reward.
Your losses are limited by your income tax bracket… so MANY people will get little to NOT loss carryover from the prior years !
so if I lost even more, I'd have an even bigger tax break? Gee, Maybe "I" need a break.