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The information in this e-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice,
accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used
as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or
taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular
situation.
The author of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a
taxing authority, nor may any user/recipient of this document use this document's written tax advice for that purpose. This document's
tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice.
Therefore, any user/recipient of this document should seek an independent tax professional's advice regarding the user/recipient's
particular circumstances.
The information is provided "as is" with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and
without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for
a particular purpose.
The information in this e-newsletter is for general guidance only, and does not constitute the provision of legal advice, tax advice,
accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used
as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or
taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular
situation.
The author of the tax articles in this e-newsletter did not intend nor write the advice to be used to avoid any penalty imposed by a
taxing authority, nor may any user/recipient of this document use this document's written tax advice for that purpose. This document's
tax advice was written specifically to support the promotion or marketing of the transaction/matter addressed by the written tax advice.
Therefore, any user/recipient of this document should seek an independent tax professional's advice regarding the user/recipient's
particular circumstances.
The information is provided "as is" with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and
without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for
a particular purpose.
| Serving the Central Pennsylvania area since 1981 |
| Robert A. Romako, CPA |
| WHEN TO BUY A MUTUAL FUND No, this is not my fearless predictions on which funds to buy. But, when you purchase a mutual fund may have unforeseen tax consequences for the investor. Read on to discover how to time your purchases to avoid unwanted taxes. First, let’s briefly review what a mutual fund is. Basically, it is a pool of individual stocks that a fund manager buys and sells to increase the value of each investor’s share. It’s a great way for an investor to reduce risk versus owning individual stocks, while having the benefit of professional fund management. Mutual fund investors pay taxes in three ways: (1) on the dividends the individual stocks earn while held within the fund, (2) on the gains from selling the mutual fund shares, and (3) on the gains from buying and selling trades by the mutual fund manager. It is this third type of income – called capital gains dividends – that investors can control based upon when they make their mutual fund investments. Since mutual funds typically pay out their capital gains in December, investors who purchase funds late in the year end up paying a tax on part of the money they invested. How does this happen? Suppose a mutual fund starts the year owning 10 stocks, each with a market value of $1,000. The fund value is, therefore, $10,000. If the fund sells 1,000 units to investors, each unit, or mutual fund share, would sell for $10. During the year, the fund manager sold some of the fund holdings and generated a $5,000 profit, which the manager reinvested into new stock holdings. Now the fund is worth $15,000; each of the 1,000 mutual fund shares is now worth $15. The capital gains for the year ($5,000) are credited to fund shareholders as of a certain date, usually in December. So, if an investor buys the fund shares in the latter part of the year, they are purchasing part of the fund’s appreciation that will soon be reported back to them as capital gains. It doesn’t mater that the investor did not hold the fund for the full year – if they are the owner of record on the declaration date, they are credited with the full amount of the capital gains for the year. (Note: I use the term “capital gains”, which represents gain to the mutual fund for stocks held more than one year. Mutual funds have short-term gains as well, which are added to ordinary dividends at the end of the year for tax reporting purposes.) Some brokers fail to educate their clients about this gain reporting, and the potential for tax on declared capital gain dividends. For investors purchasing mutual funds for their retirement accounts, the timing of the purchase is not important since the gains are not taxed. However, other investors are encouraged to consider the potential tax effect of making purchases late in the year. |
DECEMBER 2008
| Robert A. Romako, CPA Phone:717.774.3047 |