Since the Great Recession of 2008-2009, many investment managers have been able to avoid distributing large capital gains to their investors.
Now that the S&P 500 has come roaring back and having made new highs, capital gain distributions are making a comeback. However, many investors are not prepared for its return and may be unpleasantly surprised when April 15th rolls around.
Being invested in mutual funds or exchange-trade funds (ETFs) gives the benefit of diversification and professional management. However, when it comes to tax-management, many of these fund managers score a D- or below.
Capital gain distributions are paid out when fund managers decide to sell assets that have unrealized gains. This means when a fund manager decides to sell an asset to buy another asset, the end investor may have to pay capital gains even if the investor did not actually hold shares of the fund for the same length of time. This could mean that an investor may have to pay capital gain taxes when there has been no real financial benefit to themselves personally.
Why You Should Work with an Investment Advisor
Having an investment advisor that pays attention to capital gains and helps harvest losses is key to successful tax management. Investment choices should not be made solely on taxes alone, but tax management should not be completely ignored either.
Remember, individual retirement accounts (IRAs) do not pay taxes on capital gains annually, so investments with high turnovers (lots of buying and selling) may be better suited to be held in IRAs versus taxable brokerage accounts.
At Chatterton & Associates, our certified financial planners work closely with our clients to provide them comprehensive investment planning and management services.