7 Smart Tax Moves to Reduce Taxes on Mutual Funds

Mutual funds can be a great way to invest because they have many advantages. However, mutual funds also have a lot of tax complications. Most investors aren’t aware of the associated tax issues when they first invest in mutual funds, but they’re important concerns.

If taxes are having a significant impact on your mutual fund returns, there are steps you can take to address tax issues.

Here are 7 ways to reduce taxes on your mutual fund investments:

1. Avoid purchasing shares before an ex-dividend distribution. Funds pay their capital gains distributions on a specific date.

• It doesn’t matter whether you owned the shares for 1 day or 10 years, you’re immediately going to be responsible for tax on the capital gains. This is true even you didn’t own shares in the fund when the gain was realized.
• Check and see when the fund makes its distributions. If it is happening soon, just wait until the date has passed.
• Most distributions happen towards the end of the calendar year. That is why the beginning of the year is a great time to purchase mutual funds.

2. Put your high-yield funds in tax-deferred accounts. All other things being equal, high-yield means high-tax. If possible, own these investments in tax-deferred accounts where the tax penalty will be minimized and your long-term gains will be the greatest.