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Sunday, November 15, 2015

Be Cautious of Late In the Year Mutual Fund Purchases

This is the time of year to be cautious about buying a mutual fund. Many funds pay dividends near the end of the calendar year in December. If you buy one now, and it pays a dividend, you will be paying taxes for 2015 on the dividend. However, you are not any “richer” for the dividend, since the mutual fund value will usually decline by the amount of the dividend you receive.

All you are doing is prepaying future taxes, in effect. If you sold the fund after the dividend, your gain will be reduced per the value reduction that occurs from the dividend. Thus, your tax payment buys you lower gain later (or possibly a capital loss).

You will still be taxed even if you reinvest the dividend in buying new shares of the fund.

The solution is to check the anticipated ex-dividend date of the dividend and buy after that date.

Another solution for that “have to buy now” fund is to buy it in a tax-deferred account, such as an IRA or 401(k) plan – since the owner of that account does not pay current income taxes on the earnings of the account.

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