Good morning, good afternoon, good evening. This is Jonathan Satovsky of Satovsky Asset Management, year-end 2021.
I want to talk about mutual fund capital gains on this episode of Seeking Wisdom, Wealth, and Wellness. There’s been a massive increase in the use of exchange-traded funds because of tax efficiency.
Well, those that are in legacy mutual funds that have been held for years and decades, which was the primary vehicle for people to save in a diversified pool of assets, are subject to year-end distributions. A stock that was bought in a portfolio 10, 20 years ago can have tax ramifications for someone buying a fund today. It’s a very peculiar concept; let me explain. You can invest $100,000 today in a mutual fund, December 1st, 2021, and on December 15th, they may pay $3,000, $5,000, $10,000, or more in a capital gain distribution.
Now, the value of your account doesn’t go up by that amount, the value of your account may stay the same. So the $100,000 is invested, you still have $100,000, assuming that performance is flat, yet you get taxed as if you’ve already made $10,000 theoretically based on the legacy of the fund itself making a distribution as a proportion of the position. A little complicated, but I mention that because it’s a surprise to many people.
Tax sensitivity is equally as important in the construct of a portfolio over decades. So be mindful, it’s not just about performance, it’s what you keep.
Have a great day.
