MJ DeMarco
I followed the science; all I found was money.
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This advice isn't classified as "Fastlane" or "Slowlane" because it is really just a lesson in finance. Regardless of the lane, knowing this information can save you hundreds, if not thousands.
Be cautious buying mutual funds at year end as a buy point at the wrong time could cost you thousands. Why? Mutual funds distribute capital gains at year end which results in an immediate taxable event to you, even if you only owned the fund for 3 days.
An example from my own personal experience...
I'm looking to dump $1,000,000 into a XYZ Mutual Fund to produce some passive income.
I buy 100,000 XYZ Fund shares at $10 on December 1st.
Total account value:
XYZ Mutual Fund: $1,000,000 (100,000 shares @ $10.00)
Unfortunately, If I don't do my homework and the XYZ Fund distributes capital gains on December 2nd of 60 cents per share, I'm gonna get HIT with unecessary costs which in no uncertain terms, is like tossing $$ out the window of a moving car.
Immediately as the mutual fund company distributes cap gains, the share price drops to $9.40 and my account is allocated $60,000 in cap gains.
Now my account reads:
Total Account Value:
XYZ Mutual Fund: $1,000,000 (106,383 shares X $9.40 share)
Problem: The $60,000 in new shares will be taxed as short-term capital gains immediately resulting in a loss of $21,000 to your net worth -- added to your tax bill.
The prudent thing is to wait AFTER capital gains distributions to avoid unwanted capital gain distributions being tacked on to your tax bill -- resulting in detrimental effects to your total ROI.
This example applies to any size investment - the loss determined by your short-term capital gains rate.
For large sized investments in any fund, it is important to wait until after cap-gain distributions. For smaller investments, it might not make much a difference as the opportunity cost exceeds the tax hit. (For smaller income brackets)
MJ
Be cautious buying mutual funds at year end as a buy point at the wrong time could cost you thousands. Why? Mutual funds distribute capital gains at year end which results in an immediate taxable event to you, even if you only owned the fund for 3 days.
An example from my own personal experience...
I'm looking to dump $1,000,000 into a XYZ Mutual Fund to produce some passive income.
I buy 100,000 XYZ Fund shares at $10 on December 1st.
Total account value:
XYZ Mutual Fund: $1,000,000 (100,000 shares @ $10.00)
Unfortunately, If I don't do my homework and the XYZ Fund distributes capital gains on December 2nd of 60 cents per share, I'm gonna get HIT with unecessary costs which in no uncertain terms, is like tossing $$ out the window of a moving car.
Immediately as the mutual fund company distributes cap gains, the share price drops to $9.40 and my account is allocated $60,000 in cap gains.
Now my account reads:
Total Account Value:
XYZ Mutual Fund: $1,000,000 (106,383 shares X $9.40 share)
Problem: The $60,000 in new shares will be taxed as short-term capital gains immediately resulting in a loss of $21,000 to your net worth -- added to your tax bill.
The prudent thing is to wait AFTER capital gains distributions to avoid unwanted capital gain distributions being tacked on to your tax bill -- resulting in detrimental effects to your total ROI.
This example applies to any size investment - the loss determined by your short-term capital gains rate.
For large sized investments in any fund, it is important to wait until after cap-gain distributions. For smaller investments, it might not make much a difference as the opportunity cost exceeds the tax hit. (For smaller income brackets)
MJ
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