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Tax Planning with Mutual Funds – 10 Ideas to Max Your Benefits

Tax Planning with Mutual Funds – 10 Ideas to Max Your Benefits

Mutual funds benefit from the long-standing belief that they allow investors to diversify their holdings without buying individual stocks. But to the unwary investor, tax surprises abound. From a tax planning viewpoint, here are some great mutual fund tips. Most of these tips assume your mutual fund investment is not in a retirement account (like a 401(k) or traditional IRA), unless otherwise noted.


  1. Recordkeeping is important. Keep good records of every transaction. While brokers are now required to report your cost basis to the IRS, the information they provide may be in error. It’s best to develop a digital or paper filing system to confirm the accuracy of what your broker is reporting.

  3. The IRS wants your cost basis. Know what each share of your mutual fund costs you. This cost basis includes any costs related to the transaction like brokerage fees. It can get pretty complicated as your mutual fund buys and sells shares in underlying individual equities that make up the mutual fund. It is even more complex if your mutual fund automatically reinvests any dividends.

  5. Transfers could cause a tax event. Ask you broker or agent if there will be a capital gain if you transfer mutual fund shares from one account to another. What appears to be a transfer may actually be a sale of shares in one fund and a purchase of shares in another. This can create a taxable event if not handled properly.

  7. Long-term gains create a potential tax benefit. Whenever possible, time your sales to avoid short-term capital gains (on assets held less than one year). Short-term capital gains are taxed as ordinary income, whereas long-term capital gains often have a lower tax rate.

  9. Time your sales to account for dividend distributions. If you’ve owned appreciated mutual fund shares for more than 12 months and want to sell, find out when your fund distributes dividends. Dividend tax rates could apply and may be very high. Selling before the dividend payout may keep all your earnings as long-term capital gains.

  11. Dividend distribution can impact the fund’s value. Similarly, if you’ve had your eye on a particular fund, understand the historic payout of dividends. The cost of the mutual fund might be artificially higher right before a dividend payout. To make matters worse, you may even get a dividend distribution that is taxed at higher ordinary income tax rates for gains that occurred before you purchased the mutual fund.

  13. Take advantage of tax-deferred investments. Maximize your contributions to tax-deferred plans, especially those with matching contributions from your employer.

  15. Plan withdrawals from retirement accounts to be tax-efficient. Remember withdrawals from mutual funds within retirement accounts like 401(k)s and traditional IRAs are taxed as ordinary income. Because of this you should plan for your withdrawals to be as tax-efficient as possible.

  17. Charitable gifts of mutual funds has a tax benefit. As with individual stocks, consider donating appreciated mutual fund shares instead of cash. Tax law allows you to deduct the full market value of the higher share price without having to claim a taxable gain on the appreciation of the share value.

  19. Look at mutual fund costs. Disclosure rules require fund managers to adequately display the costs associated with each mutual fund. All things being equal, consider these operating costs when deciding between similarly performing mutual funds in a category.
Michael Guertin

Michael is the President of Aperto, a family-owned and operated CPA firm based in San Antonio, TX. He's an entrepreneur that happens to be a CPA and he's been helping small business owners thrive for over 16 years.

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