Tax implications liquidating mutual funds

Small-cap funds sometimes face situations that require them to liquidate their holdings, for example when the market capitalization of a small firm increases so much that it is no longer suitable for inclusion in a "small cap" fund.

In these cases the funds often liquidate their positions in these winner stocks and thereby realize taxable capital gains.

All types of IRAs (traditional and Roth) and 401(k)s don’t typically trigger taxes when rolling over from one provider to another.

(An exception is converting from a traditional IRA to a Roth, which will trigger taxes.

While nothing in this piece should be construed as tax advice, since individual circumstances can vary greatly, the following should serve as a general illustration of the cost and benefit of a transitioning to a better investment. As an example, you might want to move out of an actively managed mutual fund.

Research has shown that a portfolio of actively managed funds is expected to underperform by 1.01% a year on average, after fees, compared to an all index-fund portfolio.

The real question to ask yourself when looking to move your investments to Betterment is, If you’re a short-term investor and plan to hold assets for a couple of years, or less, there’s not much to gain from transitioning to a more efficient portfolio (although it should be noted that under this scenario, you’ll realize the capital gains very soon in any case.) And as a general rule, you should only consider moving appreciated investments that you’ve held for more than a year in order to qualify for long-term capital gains on liquidation.

Such liquidations often lead to the realization of capital losses, which actually reduce the tax burdens of the fund investors.In Tax-Efficient Asset Management: Evidence from Equity Mutual Funds (NBER Working Paper No. The study finds that tax-efficient funds have tended to outperform other funds with respect to both before-tax and after-tax returns.Income taxes on dividends, short-term capital gains, and long-term capital gains can significantly reduce the after-tax return that a taxable investor earns, relative to the pre-tax return on a mutual fund.Contact Dan at Google You can contact Dan via email or follow on Twitter.Millions of baby boomers who are set to retire over the next few years may some day regret that they didn’t pay more attention to the tax implications of their mutual fund investments during their working lives. equity mutual funds that are "tax efficient" in the sense of following investment and trading strategies that minimize tax burdens on taxable investors.

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