Big Tax Distributions Coming to a Mutual Fund Near You…

Wow!   Check this link from Vanguard which shows their preliminary capital gain distribution estimates for various funds in December.

Now, be advised, I’m a huge fan of Vanguard.  John Bogle is truly one of my heroes for bringing investing to ordinary Americans.  However, even Vanguard is not exempt from its funds having some significant distributions to shareholders.  (Understand a distribution is taxed to YOU the shareholder, regardless of how long you’ve owned the fund or if you’ve actually made any money in it. )

If you own a mutual fund outside a retirement account or annuity it would be very beneficial to understand the potential tax consequences of your fund so you can plan accordingly.  For example,  Vanguard’s Explorer Fund – VEXPX will distribute 11.47% of its total value in December!

This means if you hold $100k in this fund, you will receive a 1099 in Jan of $11, 470,  taxable to you as capital gains.   Don’t forget this fund also has a dividend yield of .78%  which is more taxable income for you to report…good times.

At the end of the day, those who own this fund will receive nearly 13% of its value as taxable distributions!

I will not comment on if this is good, bad or ugly, as it is completely contingent on YOUR circumstances.  However, I will go on a ledge to predict that many shareholders who own mutual funds have no clue what the tax consequences of their funds will be next year when they suddenly receive their 1099s.

Oh, I can hear some folks saying “well, too bad for them Josh but all my money is in my retirement account so this doesn’t apply to me.” Indeed, you would be correct in that assessment. Capital gains and dividend taxes do NOT affect you in the least in your retirement accounts. It’s actually worse for you!

Distributions from your retirement account are taxed as Ordinary Income which is almost always significantly higher than dividend and capital gain taxes!

We’ll have lots more to talk about regarding IRA taxes and how to mitigate those in the future. So stay tuned!

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