Transcripts

"Of Mutual Interest"-Buying & Selling Mutual Funds

SUSIE GHARIB: In tonight's "Of Mutual Interest," buying and selling your mutual funds can be tricky this time of year. Here with some help is John Waggoner, mutual fund columnist at "U.S.A. Today" and author of "Bailout: What the Rescue of Bear Stearns and the Credit Crisis Mean for Your Investments."

JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: If you've watched your stock fund plummet this year, you may be thinking to yourself, gosh, can things possibly get worse? Of course they can. A few months of enormous losses are also doling out big capital gains payments, so in addition to losing your shirt, you'll get a big tax bill as well. When a mutual fund sells a stock at a profit, it must distribute those gains to shareholders. Funds also have to distribute any income they receive at least once a year. Most funds typically distribute their gains between now and the end of the year.

What's wrong with that? Well, you owe taxes on the gains and the income. Long-term gains are taxed at 15 percent, income is taxed at your highest tax rate. So if your fund distributes $1,000 in capital gains, you've just added $150 to your tax bill. You'd expect the distributions when the market is soaring, but many investors have sold their stock funds, forcing funds to sell positions to meet redemptions. Vanguard's precious metals fund for example has plunged 61 percent in the past 12 months, but it's distributing $1.95 per share in capital gains and the American Funds New Perspectives fund down 46 percent, estimates its distribution at 7 to 9 percent of its share price.

Many funds will have no distributions this is year, but if your fund does you'll get the full amount no matter how long you held the fund. If you buy a fund before it makes its distribution, you'll just wind up paying more taxes so, don't make a bad situation worse. If you're thinking about buying a fund now, check to see if it's made its capital gains distribution first. I'm John Waggoner.