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Tax managed funds are typically characterized as having a low portfolio turnover rate usually 20% or less which can result in lower potential tax implications for the shareholder.
These funds are typically "growth, value-oriented" funds which place a high emphasis on buying and holding the underlying securities for longer periods of time. The securities purchased also are characterized as low-dividend producing stocks, thereby reducing or eliminating the potential for ordinary income taxation.
Lower Capital Gains Tax Incentives
Capital gains and losses are classified as long-term or short-term, depending on how long you hold the asset before you sell it.
If you hold it more than one year, your capital gain or loss is long-term.
If you hold it one year or less, your capital gain or loss is short-term.
Net capital gain is the amount by which your net long-term capital gain is more than your net short-term capital loss.
Since 2007, the tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income and are called the maximum capital gains rates. Currently (for 2009), the maximum capital gains rates are 5%, 15%, 25% or 28%.
If your capital losses exceed your capital gains, the excess is subtracted from other income on your tax return, up to an annual limit of $3,000 ($1,500 if you are married filing separately).
Since investors are typically attempting to maximize gains and growth potential to offset future college expenses, it can pay to use these types of tax efficient funds.
Potential Disadvantages
The disadvantages that a potential investor should be aware of are that fact that the fund managers may be 'enamored' with particular securities that are out of favor or performing under market/industry standards. Further, they may be unwilling to unload a security for fear of triggering taxable gains to the shareholder because of the fund's overall objective.
In 1997, the average growth mutual fund in America had a stunning portfolio turnover rate of 89%. Although this does not necessarily mean taxable gains were triggered, it does give one a good idea or contrasting perspective to those funds whose main objective is high returns with no turnover restrictions.
Since the passage of TRA 1997, several "tax managed funds" have become available. However, there are also a handful of funds that have operated under this same objective long before it came into vogue.
Action To Take If you would like to learn more about Tax
Efficient Mutual Fund Investing |
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Fielder Financial Management, LTD.
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Securities are offered through Girard Securities, Inc.
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Disclosure: For more complete information about mutual funds, including charges and expenses, obtain a prospectus by calling 1-800-480-7526. Read it carefully before you invest or send money. Mutual funds are subject to market fluctuations, investment risks and possible loss of principal. Consult your tax advisor.
