With mutual funds, it's not what you earn but what you keep that makes the difference.

By Peter Recchia, CPA, AIF

August 19, 2015

During tax season, client tax returns cross my desk for review and I notice that some filers lose investment gains and income to taxes. Because taxes will take a slice of the pie from your investment returns, you should ask yourself, "How tax-efficient are my investments?"

The objective of many investors is to focus on total return when evaluating fund performance. That makes sense because what motivates them to invest in the first place is the potential for a fund to help their assets grow. But just looking at a total return by itself is not going to show investors the whole picture in terms of how much money the fund has made or lost them. Why? Total-return statistics will not show how much of a fund's gains and income is lost to taxes.

When a fund held in a taxable account has been sold and it has increased in share price (gains) or receives dividends or interest from its holdings (income) those gains and income are passed on to shareholders who must then pay taxes on them. This is in addition to any gains the shareholder must pay taxes for selling his own shares of the fund. (Retirement plans such as 401(k)s and IRAs are excluded and have an advantage because they are tax deferred.)

Taking a "tax managed" approach with your investments.

In addition to wearing my CPA hat, it is also my job as an investment advisor to look for funds that not only earn good returns but also help keep the earnings in my client's pocket and not on the tax return. One way to do this is by using mutual funds that are actively managed in order to minimize the taxable income they produce.

Contact me to learn how tax managed funds are great way to manage capital gains and income taxation. In the meantime, read more about taking a tax managed approach with your investments at aboutmoney.com.

Email Peter if you need guidance.


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