Should You Sell a Fund To Avoid A Distribution?

December 9, 2010

One of the questions facing investors who have taxable accounts this time of year is, should I sell a fund to avoid a distribution?

There are a number of factors to consider:

• Would your tax liability be higher if you held the fund or sold it?
• Is the expected distribution larger than the gain you have made in the fund?
• How much of the distribution will be long-term gain, short-term gain or income?
• How long have you held the fund? If it’s past 12 months your gain would be long-term if you sold it.
• Would a sale trigger a redemption fee? Check with the fund and your broker to see about possible fees.
• How is your fund ranked? We don’t recommend selling a highly-ranked fund to buy a lower-ranked one just for tax purposes.

For example, if you’ve held a fund longer than 12 months and the fund is about to distribute a sizable short-term gain, you may want to sell the fund to realize your long-term gain now.

On the other hand, in the Monthly Upgrader Portfolio this month, we opted to hold a fund because the fund’s estimated distribution is smaller than the 20% short-term gain we’d realize if we sold the fund, and part of the fund’s distribution is long term.

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