U.S. mutual funds hit investors with big capital gains

Reuters

By Tim McLaughlin

BOSTON, Dec 11 (Reuters) - Capital gains pain has arrivedfor U.S. mutual fund investors.

U.S. mutual funds are disclosing some whopper capital gainsdistributions, anywhere from 6 percent to 60 percent of netasset value, underscoring stock market success and a potentialyear-end tax headache for investors. The year-end distributionsare among the largest seen since the start of the financialcrisis in 2008, according to U.S. regulatory filings.

Fidelity's $16 billion Magellan Fund, for example,plans to distribute capital gains of $5.52 a share in 2013. Thatis up from just 2 cents a share in 2012, according to funddisclosures. So far in 2013, the fund is up 32 percent.

Boston-based Fidelity, the No. 2 U.S. mutual fund company,said it is difficult to broadly characterize distributions fromfunds. But many Fidelity stock funds will distribute gains toinvestors this year, Fidelity spokesman Charlie Keller said.

Shareholders, except for those in tax-deferred accounts suchas 401(k) plans, are required to pay taxes on the distributions,regardless of whether they are paid out in cash or reinvested inmore shares. Short-term capital gains are taxed at ordinaryincome tax rates while long-term gains are taxed at a maximumrate of 20 percent.

There are some oddities in the mix. For example, gains fromthe sale of certain commodities such as gold bullion are taxedat a 28-percent rate regardless of the taxpayer's federal incometax bracket, according to a primer from money manager Waddell &Reed Financial Inc.

The final tally for investors is memorialized on theInternal Revenue Service Form 1099-DIV, which is typicallymailed out in January.

The good news is that the payouts reflect mutual fundstaking profits from selling securities in their portfolios.

Some actively managed stock funds at Vanguard Group, thelargest U.S. mutual fund company, are paying gains approaching10 percent of net asset value, Vanguard spokesman John Woerthsaid. He called that 10 percent range sort of the unofficialthreshold for what might be considered a large distribution.

At BlackRock Inc, the $4.3 billion CapitalAppreciation Fund plans to distribute gains toshareholders of up to 15 percent of the fund's average net assetvalue, according to the company's projections. And thedistribution payout at the small BlackRock Large Cap GrowthRetirement portfolio could top 60 percent, according to companyestimates.

Vanguard's online tax center offers a way to sidestep a bigcapital gains distribution before investing a large amount in amutual fund. If the gains represent a large portion of thefund's net asset value and the record date of the next capitalgains distribution is near, investors may want to delay theirpurchase until after the record date.

"Otherwise, you'll 'buy the dividend' and that can cost youmoney in taxes," according to Vanguard's tax center.

Tax experts also warn that if you sell a fund to avoid thedistribution, be careful not to buy the fund back within 30 daysbecause you will run awry of IRS wash sales rules.

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