Taxable Account Investing Mistakes
May 26, 2008 – 6:28 amI’d like to raise an issue that can catch new investors who use taxable accounts off guard. Before you invest in a taxable account please make sure to check if a fund or investment has any scheduled distributions coming up. This is mostly a problem when purchasing funds towards the end of the year. Most mutual funds make an annual distribution between Thanksgiving and the end of the year. And these distributions can be sizable! If you were to purchase shares before the distribution date part you would essentially be getting part of your investment returned to you and taxed!!!
Don’t make this mistake. It’s better to wait until after the distribution goes into affect, and then purchases the shares you want.
This is true for some bond funds as well. I owned a high-yield bond fund for several years which made quarterly distributions. Therefore I waited (what ended up being just a few weeks) to make my purchases so I wouldn’t be taxed on an immediate distribution. Likewise when I sold out of that fund recently to rebalance I waited until just before the distribution. That way I was able to maximize my capital gains, which were all long-term, and minimize any distributions that would have been taxed at a higher rate.
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