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November 23, 2020 at 03:17 PM
Capital gains distributions can be a conundrum and are among the “least attractive aspects of mutual fund ownership,” says Christine Benz, Morningstar’s director of personal finance, in a recent column.
These distributions mainly affect wealthier investors who are in taxable accounts, and this type of client will generally owe taxes.
Plus, Benz notes, the distributions don’t necessarily coincide with the client’s gains in a fund.
For example, some value-leaning funds are making distributions in 2020 “triggered by redemptions or manager changes,” she says, noting this may happen even though they might be in the red.
“Talk about adding insult to injury!” she adds.
What should you advise clients who are facing these tax consequences?
Conventional wisdom says it’s rarely a good idea to sell in a bull market, because a client could owe taxes on both the capital gains distribution and the difference between the cost basis and what the client’s shares were worth at time of the sale, Benz states.
A better gauge is how the client feels about holding or selling. The Morningstar expert provides three strategies on how to deal with this dilemma.
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