This week on the Retirement Quick Tips Podcast, the theme is: your 2021 Year-End Tax Planning Checklist

Today, I’m talking about capital gains surprises in 2021. 

With the stock market up big in 2019, 2020, and now 2021, this year is shaping up to be a big year for mutual fund capital gains distributions, which can be big tax surprises for investors. 

Just looking at one example - one of the most widely held funds among investors is the American Funds Growth Fund of America, with nearly $300 billion in assets in just this one mutual fund. 

The GFA will be paying out a capital gains distribution to shareholders of the fund in late December in the range of 7-10% of the fund’s value. So if you own $100,000 in that fund, you’ll receive a $7-10m capital gains distribution, that is then taxable to you. 

That’s the way the rules work for mutual funds - they must distribute capital gains to shareholders - but it can create some inconvenient tax surprises. 

First of all, it’s important to realize that these capital gains distributions will only be consequential in your taxable accounts. If you own mutual funds in your 401k, IRA, Roth, or some other tax-deferred account - the capital gains distributions won’t cause an additional tax bite for you. But that’s not the case in taxable accounts. 

So it’s important to review the mutual funds you own in your taxable accounts. You should pull a list of the mutual funds you own in taxable accounts and then go to the websites of the fund companies to find out what the capital gains distribution is and the likely impact for you. Or if you’re working with a good, proactive advisor - he or she should be doing this for you. 

If your mutual funds in taxable accounts were purchased recently and you don’t have a large gain, but you’ll be receiving a substantial capital gains distribution, it might make sense to sell the fund before the record date so you can avoid the capital gains distribution, and then buy it back 30 days later or in early 2022. 

Another important takeaway from capital gains distributions is that you should always be cautious about buying mutual funds in taxable accounts in the later part of the year. Many mutual fund companies will post their anticipated capital gains distributions for the year in the early fall, so be sure to check that before you buy mutual funds in the later part of the year. 

That’s it for today. Thanks for listening! My name is Ashley Micciche and this is the Retirement Quick Tips podcast. 

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Tags: retirement, investing, money, finance, financial planning, retirement planning, saving money, personal finance