As we approach the end of tax season, mutual fund investors may be surprised to face what many call a “double whammy” — paying capital gains taxes on investments in mutual funds that incurred losses in 2015. In most major markets last year, many mutual funds experienced losses or very small gains. Nonetheless, investors are still faced with taxes on capital gains, even though they actually only made little or no profit on the investments.
This unpleasant hit is even more exaggerated for short-term capital gains, as these are taxed at an investor’s income tax rate instead of long-term capital gains, which are typically 15% or 20%. For high net-worth families and individuals, this can be a significant difference.
Even if an investor makes a profit on their mutual funds, taxes can turn those gains into losses. Financial publication ThinkAdvisor offers a great example of how this can happen. Let’s say an investor has a $100,000 fund portfolio that gained 0.5% before taxes and distributed 10% of its NAV in capital gains. Despite gaining $500, an investor in the top tax bracket would have to pay $2,300 in taxes, resulting in a $1,800 loss.
Too often, these taxes catch investors by surprise because they weren’t aware of the small print and hidden expense ratio that comes with mutual funds. One alternative is to choose actively managed funds that focus on mitigating tax liabilities by harvesting tax losses throughout the year. Investors should also be well aware of the difference between short and long-term capital gains, as short-term gains are taxed at higher income tax rates for many investors.
At Nobile Hinchey Private Wealth Management, we believe it’s essential for investors to understand thoroughly the investments they choose and how they will impact their taxes. Focusing on transparency, education, and objective advice, we strive to empower investors to feel confident in their investments and not be caught by surprise during tax season.
One way we do this is by avoiding mutual funds altogether and the fees that come with them. We instead work with top money managers to actively manage our clients’ money. By working with these top money managers, our goal is to diversify and strengthen our clients’ portfolios, mitigating losses and tax liabilities as well as we can. Many of our clients would rather preserve their wealth rather than take large risks, and our strategies are designed to align with these preferences.
If you have questions about your investments, or currently have mutual funds and aren’t satisfied with your gains or losses, we encourage you to call our office at (860) 659-5977 or email me at firstname.lastname@example.org to discuss. We are happy to provide you a complimentary portfolio review where we’ll review your current holdings and compare them with your risk tolerance and goals. You can also pass along this article to your friends and family and let them know we’re happy to speak with them if they have any questions.
About Michael Nobile
Michael Nobile is the CEO of Nobile Hinchey Private Wealth Management, an independent financial services firm serving high-net-worth families and business owners near Glastonbury, Connecticut. Michael brings 35 plus years of experience in the wealth management industry and is extremely knowledgable in retirement income and tax advantaged strategies. Outside the office, Michael enjoys time with his wife, two children, and two grandchildren. Longtime Glastonbury residents, they now reside in East Hampton. It’s Michael’s dream to introduce his grandchildren to his business and work together someday.