Retirees Should Be Careful What They Wish For: I'm Not Thankful For Big Capital Gains Distributions, Should You Be?

George Schneider profile picture
George Schneider


  • Mutual Fund investors may get walloped this year with big tax bills.
  • Is it tax-efficient to invest in Mutual Funds in a taxable account?
  • How can you lessen the impact of taxes from capital gains distributions?

Around this time of year, early to late December, mutual funds distribute their capital gains to fund shareholders. To the unitiated, this feels like a Christmas bounty. It's only later, around February of the following year, that shareholders receive their 1099s in the mail, detailing what part of the distribution was income and what part was a capital gain.

That's about when it dawns on many investors that they're going to owe Uncle Sam the 15% capital gains tax (for those in the 25% income tax bracket) on the amount of the capital gains. And, for those investors who have chosen to automatically reinvest all capital gains in new shares of the fund, they're stuck trying to figure out where to get the extra bucks to pay these extra taxes.

Why the Capital Gains this year, and why so big?

Funds might sell appreciated securities for various reasons.

1. Perhaps a stock hit management's sell target - not out of the question, given the ongoing strength in the 2009-2014 bull market - or a new manager came aboard and wanted to balance or rebalance the portfolio.

2. Or perhaps management had to liquidate positions to pay off departing shareholders (PIMCO comes to mind, having suffered outflows of over $32 billion in October alone).

Whatever the particular cause, if funds have sold appreciated securities during the year, by law, they have to distribute those capital gains to shareholders. If the shareholder owns the fund in a tax-deferred account, the distribution is a non-event from a tax standpoint. But if the investor owns the fund in a taxable account, he will owe capital gains taxes on these distributions. Those taxes will be due. Unfortunately, regardless of whether those gains were reinvested right back into the portfolio and even if the investor didn't sell a single share, those taxes are still due.

This article was written by

George Schneider profile picture
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Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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