MAKING APRIL 15TH YOUR FAVORITE DAY
tions from your qualified plan, you will be taxed on the amount com- ing out, regardless of what the money was invested in. For this rea- son, it’s best to hold taxable income-producing equities, such as income-geared mutual funds or stocks with historically high divi- dends, inside a qualified account. To own a tax-free investment inside a qualified account is to needlessly tax yourself on tax-free income. Who would want to do that?
Another potential mistake is when people in the lowest tax bracket purchase municipal bonds and bond funds. Because their tax bracket is already as low as it can go, the advantage of owning muni bonds is lost on them. Muni bonds and bond funds are the most advantageous for investors who are in the higher tax brackets. If you are considering investing in either individual muni bonds, or in muni bond funds, figure out what your tax bracket is, and then decide if the tax-free interest is worth it. It may not be.
TAKING A LOSS
Some mutual funds have a history of producing very high capital gains distributions for their shareholders. That’s great, and most peo- ple don’t have much of a problem paying taxes on those gains as long as their funds are performing well. But what about when there is a bear market and mutual funds aren’t performing very well? These same funds will still produce relatively high, or higher, capital gains at the end of the year. Then their shareholders are going to have to pay taxes on these gains when their funds may have even declined in value over the year.
A simple strategy that I occasionally employ is to produce a cap- ital loss for a client. All you do is sell an equity that is currently sell- ing at a price less than what the client paid for it, thus producing a capital loss. For example, you purchase the XYZ Value Fund at $22 per share. You’ve held the fund for a couple of years and it has done relatively well. After all the capital gains and dividends have been reinvested, your average cost per share is $20.50 per share. However, this fund is prone to distributing high amounts of capital gains, and given the performance of the fund this year, you decide you don’t