To add insult to injury this year, not only can investors expect a rather offensive year end return from their mutual fund statement, but they should also brace themselves for an outrageous hit from capital gains distributions as well.
Why, You Ask?
In 2008, the worst year in recent history, capital gains aren't the first thing that come to mind for most investors. Many investors are busy considering how many years they're going to have to spread their capital losses against ($3,000 per year for tax losses). However, note that during the year, investors have moved Billions of Dollars out of mutual funds as the market declined (and to the dismay of some, right at the bottom which has since seen a rebound). These Billions of Dollars were shifted into safer instruments from money markets to bonds. As these redemptions started to pile up, fund managers had to unload shares in order to pay out the obligated funds. In selling off these assets, fund managers have incurred SIGNIFICANT capital gains not seen since the dot.com era to the tune of hundreds of percentage points in just a few short years.
Given the extremely lucrative returns of commodities funds and emerging markets funds over the past few years, one would expect that these funds will have especially high capital gains required, unless for whatever reason, the redemptions were marginal or the amount of cash on hand was high during the year.
Investors can some take solace in the fact that capital gains distributions are taxed as long term capital gains even if the fund was held for less than a year, but conversely, they may be outraged to be looking at a 40% loss on their mutual fund statement and then see a significant capital gains distribution to boot!
It's been quite a year and investors can look forward to one extra kick in the teeth given the rather unique circumstances this year.
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6 COMMENTS HERE
Lol, stop trying to cheer me up already. You're killing me.
If a person owns the mutual fund in a 401(k) or Roth IRA how does this affect them? Will they get a tax bill? I'm a newbie.
In a tax-advantaged account such as 401k, 403b, IRA, you won't feel the impact of the taxable distribution.
This will be primarily painful for investors with traditional mutual fund accounts.
http://freefrombroke.com/2008/12/carnival-of-personal-finance-182-dont-go-broke-over-the-holidays-edition.html
I don't agree that this is a kick in the teeth. I prefer that the capital gains be re-invested into the mutual fund that issued them. I did not cash out any assets this year and so the extra cash to re-purchase is much appreciated. And besides, I plan for these capital gains and their tax implications year after year. What's the big surprise?
It will seem counterintuitive to many investors that in a year where actively managed funds lost 40%+, they are now hit with a larger than normal tax bill. I could see why investors will be frustrated. Generally people don't mind paying some taxes on gains in a year where they actually made money - that's easy to grasp. But, paying taxes in a losing year like this will not go over well.
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