Mark Wilson, CFP
Mark Wilson, CFP, president of MILE Wealth Management, Irvine, California. He also runs CapGainsValet.com, which provides extensive capital-gains information on mutual funds. Milewealth.com
Bottom Line: Protect yourself from a mutual fund tax bite that may grow in 2019
Many investors got hit with big tax bills for 2018 as mutual funds paid out more than $600 billion in dividend and capital gains distributions, the most since 2014. One fund, Harbor International, lost 18% but paid out about 40% of its net asset value in distributions. That means if you owned $50,000 worth of its shares in a taxable account, you owed taxes on $20,000.
Why the tax bite may be even worse in 2019: Stocks have had huge run-ups during the bull market that began in 2009. Rising volatility has caused fund managers to start selling shares and realizing big profits. Federal law requires that they distribute their profits each year to shareholders.
What to do: For your taxable accounts, consider funds that specialize in minimizing tax consequences. The two funds below are passively managed index funds that are tax-efficient to begin with because they don’t buy or sell stocks very often, which reduces the likelihood of realized capital gains. And both funds take extra steps to boost post-tax returns.
Vanguard Tax-Managed Capital Appreciation (VTCLX) tracks the Russell 1000 large-cap stock index but has never distributed capital gains since its inception in 2001. It avoids stocks that pay high dividends and strategically sells stocks for capital losses to offset capital gains. Performance: 16.4%* versus 16.2% for the S&P 500.
Vanguard Tax-Managed Small Cap (VTMSX) tracks the S&P SmallCap 600 index. In addition to offsetting capital gains with losses, it sells its highest-cost-basis shares first. Despite a small distribution in 2017, the fund has one of the better tax-efficiency records in its category. Performance: 17.7%.
*10-year annualized returns through February 22 from Morningstar Inc.
