Reviewing your mutual fund portfolio in the middle of the hectic holiday season is often a distant priority to planning shopping trips and holiday gatherings, but this is a great time to do it. Here are a few tips for buyers and sellers, and also some ideas about your mutual funds to check before you do anything.
Good for you! You’re organized enough to review your mutual fund portfolio in the middle of the hectic holiday season. It’s often a distant priority to planning shopping trips and holiday gatherings, but this is a great time to do it, and your last chance to make investment changes that will count on your 2007 tax return. Here are a few tips for buyers and sellers, and also some ideas about your mutual funds to check before you do anything.
If you’re planning to sell fund shares, call the fund or check its Web site to be sure you sell before what’s called the “ex-dividend date” – everybody who owns shares on this date gets a share of the annual distribution of dividends and capital gains. That’s good, if you’re planning to sell and take capital gains anyway, right? Not exactly. Fund distributions are often not taxed as pure capital gains (like your sale would be). Part of the distribution could be taxed as income. Remember, income is taxed at a higher rate than capital gains. If you can manage the timing, you’re better off selling before the ex-dividend date so your whole gain is taxed at the better capital gains rate.
Don’t repurchase those shares too quickly. If you repurchase shares in the same investment you sold within 30 days, you’ll create a “wash sale,” meaning it’s as if the whole thing didn’t happen – no gains to report and, if you sold for a capital loss, no losses to take advantage of. If you’d like to sell your fund, but want to keep a stake in a particular industry or market sector, think about buying an exchange-traded fund. Check out amex.com for information on these new options for investing in indexes.
Here’s an important note: If you’re in the 10 percent or 15 percent income tax bracket, you should wait until 2008 to sell. The capital gains rate for those in the lowest income brackets is 0 percent in 2008! You’ll pay 5 percent capital gains rate if you sell in 2007.
If you’re planning to buy, your purchase strategy should be exactly the reverse as for a sale. Check the fund’s ex-dividend date to be sure you buy after the distributions. These distributions are made because the fund has realized profits during the year. All of the profits have already been factored into the price of the fund. If you buy the before the distribution, you’ll pay taxes on gains and reap none of the benefits.
These details may keep you busy enough that it’ll be January before you actually buy your funds. That’s just in time for the January issues of the investing magazines trumpeting enticing lists of high-flying mutual funds. Do not chase returns! Beware of funds with high turnover. Check the expense ratios and make sure your choices keep you diversified. Remember, you need a mix of fixed income and equity funds, regardless of how old you are, though the balance of those allocations will vary based on your age and retirement plan.
A couple of great Web resources to help you make the right choices are morningstar.com and fundalarm.com. Happy holidays, and a prosperous 2008!
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