Roughly two-thirds of mutual fund assets are kept in taxable accounts, according to fund industry data. Yet all too many investors don't pay enough attention to the tax implications of their investment decision-making.
That's a very costly mistake. In his speech "The Relentless Rules of Humble Arithmetic," Vanguard founder Jack Bogle notes that the average equity mutual fund loses about 2 percentage points of its average annual return to taxes.
Why are mutual funds such a potential tax headache? By law, mutual funds are required to pass all income and realized profits on investments along to shareholders through income and capital-gains distributions. If you're investing through a taxable account, you'll have to pay taxes on those distributions. Short-term gains are taxed at the higher ordinary-income rate, as is income from taxable bonds, commodities, and real-estate investment trusts, or REITS. Meanwhile, long-term gains and stock dividends are generally taxed at the 15 percent rate. Tax-sheltered vehicles like your 401(k) or in an IRA make a lot more sense in this regard.
Read the complete article
That's a very costly mistake. In his speech "The Relentless Rules of Humble Arithmetic," Vanguard founder Jack Bogle notes that the average equity mutual fund loses about 2 percentage points of its average annual return to taxes.
Why are mutual funds such a potential tax headache? By law, mutual funds are required to pass all income and realized profits on investments along to shareholders through income and capital-gains distributions. If you're investing through a taxable account, you'll have to pay taxes on those distributions. Short-term gains are taxed at the higher ordinary-income rate, as is income from taxable bonds, commodities, and real-estate investment trusts, or REITS. Meanwhile, long-term gains and stock dividends are generally taxed at the 15 percent rate. Tax-sheltered vehicles like your 401(k) or in an IRA make a lot more sense in this regard.
Read the complete article
