Taxes Don’t Go Away Just Because You Don’t Know About Them

Taxes Don’t Go Away Just Because You Don’t Know About Them..
Over the last few days, I’ve posted a video series on the difference in taxation of Mutual Funds and Exchange Traded Funds (ETFs). I’ve used various pieces of industry research and even gone over a 1040 with various schedules.

Here is one example of the videos I’ve posted.

The facts are, folks, if you own a taxable investment account, i.e., a brokerage account, and you have mutual funds you are paying too much in taxes. WAY too much in taxes.

Mutual funds must distribute their earnings to their shareholders. These earnings via dividends, interest and capital gains will find their way to you via tax form 1099. Unfortunately, in my experience, most investors simply put this 1099 in a file with their other tax stuff and hand it to their tax pro in March or April. WRONG!

At that point your tax pro is too busy to tell you what the heck is going on and thus you’ll continue to pay taxes on distributions you don’t need to pay taxes on.

Usually, it is when your mutual fund suffered a loss for the year and yet you still have taxable capital gains that gets investors outraged enough to shout “WHAT THE HECK IS GOING ON HERE!”

I will never forget an investor I spoke to a number of years ago who had a $200k account with American Century. The account fell in value to about $175k or so but she still received a $40k capital gain distribution. Now, to say she was mad would be the understatement. But guess what? That’s how mutual funds work.

ETFs though? Not the same at all. ETFs, by and large, do not have capital gain distributions which makes them much more tax efficient. In fact, it really makes no sense to own anything but an ETF in your brokerage account.

Now, be advised, don’t just rush out and sell all your mutual funds to convert to ETFs right now. You could get walloped with capital gain taxes. But do start paying attention to this stuff. At the end of the year see if you receive a 1099 from your investment firm.

Double check the front page of your 1040, line 13, to see if you had to put a number there. If so, an ETF is probably a better alternative.

Just watch the video and I show you line item by line item how this works.

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