As we recover from the end of tax season, mutual fund investors may have been surprised to face what many call a “double whammy” — paying capital gains taxes on investments in mutual funds that incurred losses in 2015. In most major markets last year, many mutual funds experienced losses or very small gains. Nonetheless, investors were still faced with taxes on capital gains, even though they actually only made little or no profit on the investments.
This unpleasant hit is even more exaggerated for short-term capital gains, as these are taxed at an investor’s income tax rate instead of long-term capital gains, which are typically 15% or 20%. For high net-worth families and individuals, this can be a significant difference.
Even if an investor makes a profit on their mutual funds, taxes can turn those gains into losses. Financial publication ThinkAdvisor offers a great example of how this can happen. Let’s say an investor has a $100,000 fund portfolio that gained 0.5% before taxes and distributed 10% of its NAV in capital gains. Despite gaining $500, an investor in the top tax bracket would have to pay $2,300 in taxes, resulting in a $1,800 loss.
Too often, these taxes catch investors by surprise because they weren’t aware of the small print and hidden expense ratio that comes with mutual funds. One alternative is to choose actively managed funds that focus on mitigating tax liabilities by harvesting tax losses throughout the year.
What is Tax Loss Harvesting?
Tax loss harvesting is the strategy of selling a security that has experienced a loss. By realizing a loss, investors are able to offset taxes. The sold security is usually replaced by a similar one to maintain the desired asset allocation and expected returns.
At Wealth and Pension Services Group, we believe it’s essential for investors to understand the investments they choose and how they will impact their taxes. Focusing on transparency, education, and objective advice, we strive to empower investors to feel confident in their investments and not be caught by surprise during tax season.
One way we do this is by avoiding certain mutual funds with high turnover and instead utilize tax-efficient ETFs. We actively manage our clients’ money with a goal of diversifying their portfolios and mitigating losses and tax liabilities when we can.
If you have questions about your investments or currently have mutual funds and aren’t satisfied with your gains or losses, we encourage you to call our office at 770.333.0113 x106 or email us anytime at firstname.lastname@example.org to discuss. We are happy to provide you a complimentary portfolio review where we’ll review your current holdings and compare them with your risk tolerance and goals. You can also pass along this article to your friends and family and let them know we’re happy to speak with them if they have any questions.
William "Bill" Kring is the founder of Wealth & Pension Services Group, Inc, an independent wealth management firm serving individuals and businesses near Atlanta, Georgia. As a twenty year financial veteran, Bill offers broad expertise in wealth management services including asset management, fiduciary consulting, retirement, trust and estate planning, as well as insurance and 401(k) plan services. In his past, he competed as a U.S. Cycling Federation class III rider in both road and track. To learn more about how Bill may be able to help, visit the Wealth & Pension website, connect with him on LinkedIn, call his office at 770.333.0113 x106 or email him anytime at email@example.com.