As we approach the end of the year and tax planning starts to come into focus, we urge you to monitor your account for potential distributions from the mutual funds you may hold. Mutual fund distributions come in the form of ordinary dividends, capital gains, and return of capital.
- Ordinary Dividends: These are the dividends that are paid by the companies held within the mutual fund and passed on to the client. The income associated with dividends is reportable for taxable purposes, and they are generally paid out through the year.
- Capital Gains: Capital gains distributions are typically seen in the latter part of the year as the mutual fund harvests gains on securities in the portfolio. These come in both the short-term and long-term variety and can sometimes surprise investors. There have been times when the market has a nice year with the gains being harvested the following year when the market is down.
- Return of Capital: Mutual funds have also made distributions to investors that are in excess of earnings and profits combined. These distributions are considered return of capital.
While mutual fund distributions are not a bad thing, they are something to keep an eye on as there may be a chance to offset them with a loss somewhere else. We recommend consulting your tax advisor to determine the potential tax ramifications.
