Help with Year-End Distributions

November 1, 2013

taxNovember is the beginning of mutual fund distribution season. Many funds make annual distributions of capital gains or income to shareholders, and these distributions typically occur in the last months of the year. Although ETFs don’t distribute capital gains, they can distribute income.

We’ve collected some useful posts on distributions, below, and we’ll continue to post about distributions over the next few months.

Should You Sell a Fund to Avoid Its Distribution?  Or Sell After a Distribution?

There is no perfect answer to these questions. We suggest that you consider the different variables, such as when you purchased the fund, at what price, etc. Ultimately we follow of the adage “Don’t let the tax tail wag the investment dog.”  Tax considerations are important, but following an investment discipline is even more important.

We believe it’s rarely worth selling a fund to avoid a long-term capital gain distribution, and that’s one reason why we continued holding Parnassus (PARNX) last year.

But some investors may consider selling a fund after it has made a distribution to harvest a tax loss.

Taking Distributions in Cash or ReinvestingWhether investors take distributions in cash or reinvest distributions in new shares, investors don’t gain anything extra from distributions.

How Bond Funds Make Distributions Many bond funds distribute income to shareholders on a monthly or quarterly basis.  Unlike stock funds, a bond fund’s share price does not drop by the amount of its income distribution.

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