Many of you who have mutual funds in a brokerage (taxable) account are about to get a nasty surprise – a big 1099 which will result in your having to pay taxes.
In mid December many mutual funds “paid out” taxable gains to shareholders (this does NOT apply to IRA’s, 401(k)’s and other tax-deferred accounts).
You didn’t get a check – but you DID get a taxable distribution. And you may even get a tax bill on “gains” — even if your fund lost money in 2014. Although not many US equity funds lost money in 2014, most funds trailed their benchmark.
According to the Wall Street Journal. as of Dec 19th, more than 79% of actively managed US stock funds did NOT beat their benchmark’s returns for the year. This compares to to an average of 59% of the funds not beating their benchmarks over the last 25 years. In other words, most active mutual fund managers didn’t earn their pay.
For example, The Janus Forty Fund trailed it’s benchmark (S&P 500) in 2014 – with only a 8.3% return. If you had $10,000 invested in that fund in mid December you will soon be getting a 1099 for taxable distributions totaling $3,385 that you will owe taxes on.
So on a $10,000 account, it earned about $830 but you are going to pay taxes on $3,385!
If you had $100,000 invested in it, the IRS will be expecting you to pay taxes on $33,850 — while it only earned $8,300! Will you take that money out of your investment to pay the taxes… or out of your checkbook? Most folks write that check out of their checkbook and now have less to spend on their lifestyle.
Mutual fund managers are not concerned with your tax bill. They are only concerned with “trying” to beat their benchmark so they can grow their assets. This is another reason why I like to use our 3rd party private wealth managers that use tax-efficient ETF’s or own individual stocks. Not only will they go to 100% cash when things turn rough to help protect principal, they don’t give you big phantom tax bills!
If you have brokerage accounts and are tired of taking money out of your checkbook to pay taxes on gains you may not even have gotten, then why not take a look at our managers.
With markets at all time highs (and likely going higher for a little longer), you might appreciate their ability and willingness to go to cash when the ax falls, as well as enjoying more tax efficiency. To learn a little more, please CLICK the MORR Capital Mgmt. tab above.
wishing you a wonderful 2015… Mark