Watch Out! You May Have Tax Liability — Even Though Your Mutual Funds Tanked
Many people invest in mutual funds because they grant instant diversity, and they offer novice investors the chance to “set it and forget it.” Unfortunately for many with mutual funds, 2008 proved to be devastating as funds lost all sorts of value. But if you don’t have your mutual fund investments in a tax-deferred retirement account, you may still owe taxes. The New York Times reports on why some investors are getting socked with taxes on mutual funds — even if the funds lost value:
When markets plunged in the fall, many investors rushed to redeem shares, causing fund managers to sell some holdings to raise cash to make redemptions. And some managers had already sold some holdings and currency contracts. Whatever the reason for the sales, many resulted in capital gains.
Mutual funds are legally classified as pass-through entities, meaning they must pass along any net realized capital gains to shareholders as dividends. But most fund investors choose to have their dividends reinvested, and if they look only at the net value on their statements, the dividends paid may have escaped their notice.
It is nice to know that you are protected from this tax issue if you have a tax advantaged account, such as a 401k or an IRA. (If you are doing conversions between types of retirement accounts, though, there are separate tax issues.)
Make sure you check your statements carefully — going beyond just the value — from your mutual fund managers to see whether you ended up with dividend earnings or some other issues. It is also a good idea to have a tax professional look over your investment statements as well to help you properly determine what (if any) your tax liability might be.
Disclaimer: I am not a financial professional. Any information you get from this site is not intended as advice. It is likely to be incomplete, and it may not apply to your individual circumstance. Do your own research, consider your situation and/or consult a professional before making money decisions.
