Watch Out for Capital Gain Distributions in 2008

December 1, 2008

Despite widespread stock market losses in 2008, several mutual fund companies have announced that they will make capital gain distributions to shareholders in mid-December.

This is a double whammy to investors because shareholders who hold mutual funds in taxable accounts must pay taxes on those capital gain distributions even if those capital gains were reinvested in the fund.  This may seem unfair when 1) you didn’t receive the money, and 2) your fund suffered a large loss for the year.

So why do mutual fund companies distribute capital gains to shareholders when the fund itself has incurred a loss for the year?  There are three reasons that funds are making payouts, even though they’re up to their ears in losses:

First, emerging markets and energy funds had big gains when the year began and realized some gains along the way. Then they suffered redemptions, which means that those gains have to be spread among fewer shareholders (i.e., the shareholders who did not bail have to pay the price for those who are trying to time the market).

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Kristine McKinley, CFP®, CPA, is the founding principal of Beacon Financial Advisors, LLC, an independent, fee-only financial planning firm located in Lee’s Summit, Missouri and serving the greater Kansas City area.

Kristine focuses on providing fee-only financial planning, investment advice, and tax preparation to individuals and families from all income levels.  About Us

In the News

Investment News – Kristine McKinley discusses the 0% Social Security COLA (for 2016) in No Social Security cost-of-living adjustment in 2016.

Kiplinger Magazine/NAPFA – Kristine McKinley answered reader’s tax questions during the 2013 Jump Start Your Retirement Plan Days sponsored by Kiplinger magazine and the NAPFA Consumer Education Foundation.