Despite Bad Year, Mutual Funds May Be Taxed
By James E. Branch, CFP, ChFC
Director of Financial Services
Gray Equity Management, LLC
Although very few mutual funds gained in value during 2008, many did have capital gains distributions. As a result, you may be surprised to learn that taxes are due, even on a mutual fund that has lost value.
The Internal Revenue Service requires mutual funds to distribute at least 98 percent of their income to their shareholders, who must report the distributions as income and pay taxes on them.
Despite the down year, many mutual funds realized gains from stocks that were sold prior to the stock market’s fall later in 2008. Thus the year-end distributions that are seemingly out of proportion to the current condition of the fund.
If your mutual fund investments are in tax-sheltered retirement vehicles (such as 401(k)s or IRAs) you needn't be worried because there are no taxable distributions. But shareholders of other funds face ill-timed distributions on top of large personal losses.