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Engaging Women in Wealth - Rancho Santa Fe, CA

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The Unexpected Taxation of Mutual Funds

| March 29, 2016
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As we approach the end of tax season, mutual fund investors may be 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 are 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 mutual funds that focus on mitigating tax liabilities by harvesting tax losses throughout the year. Investors should also be well aware of the difference between short and long-term capital gains, as short-term gains are taxed at higher income tax rates for many investors.

At Engaging Women in Wealth, we believe it’s essential for women to understand thoroughly the investments they choose and how they will impact their taxes. Focusing on transparency, education, and objective advice, we strive to empower women investors to feel confident in their investments and not be caught by surprise during tax season.

One way we do this is by avoiding mutual funds altogether and the fees that come with them. We instead work with third-party money managers at Integrous Investing who actively manage our clients’ money. By working with these top money managers, our goal is to diversify and strengthen our clients’ portfolios, mitigating losses and tax liabilities as well as we can. Many of our clients would rather preserve their wealth rather than take large risks, and our strategies are designed to align with these preferences.

To learn more about the money managers we work with, watch our video blog post about Integrous Investing. 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 contact our office by calling 858.756.0004 or emailing us at [email protected]. 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.

About Deb Sims

Deborah Sims is the Principal of Estate Management Group, a wealth management and financial services firm offering comprehensive and customized strategies to help her clients manage their assets and feel confident in their future. Her mission is to serve as her clients’ most trusted wealth advisor through professional knowledge, integrity, and personalized wealth management services. Based in San Diego, California, Deb’s team has offices in Rancho Santa Fe, Old Town, and Del Mar. She invites you to contact her team today to learn more about how they can help you.

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