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On money
© St. Petersburg Times, Muddling your way through mutual fund gains, losses Q. I must really be cerebrally challenged, but for the life of me, I cannot understand how a mutual fund that posts a 40 to 50 percent loss for the year can have a capital gain distribution that I must pay taxes on. If my balance at the beginning of the year is $10,000 and at the end of the year $5,000, how in the world is there any "gain"' in anything? Somehow this appears to be less than 100 percent on the up and up, and would appear to benefit the fund company more than the investor. I would appreciate an explanation. And remember, you aren't replying to Charles Schwab. A. When a mutual fund sells some of the stocks in its portfolio, the gain or loss will be figured based on the fund's purchase price for the shares sold. When you made your mutual fund investment, your fund already had paper gains and losses in its portfolio. In some cases, the gains might have been on positions the fund had owned for years. Whenever the fund sells holdings, it realizes gains or losses. The way mutual fund taxes work, realized losses are subtracted from realized gains and the net gain is passed along to shareholders. Even though it may not seem like it, this benefits investors. Otherwise gains would be taxed twice: at the fund level and again at the individual level when you sold your investment. The good news is that if you reinvest the gains distributions, you will increase your tax basis in the fund and pay less in gains (or be able to claim more in losses) when you sell your investment. If you don't like this situation, there is something you can do about it: restrict your investing to more tax-efficient funds. Many fund groups have funds advertised as "tax managed" or "tax efficient," which means the fund manager pays close attention to the issue. Index funds also are generally more tax efficient than actively managed funds. I hope that helps you. Charles Schwab never writes.
Q. I am 61 and was recently laid off. Work prospects do not look good for the next several months, although I do hope to get another job and would like to work full time beyond 65 if possible. I read an article recently stating that it makes good sense to start collecting Social Security benefits when you reach 62, even though your benefits would be permanently reduced. Does this make sense to you? A. Not if you expect to work full time. If you are younger than normal retirement age, your benefits will be reduced $1 for every $2 you earn above the annual earnings limit. The limit is $10,680 this year, increasing to $11,280 next year. Congress eliminated the earnings test for people who are normal retirement age or older, but it still applies to those who are younger. The rules are a little different in the year that you reach normal retirement age. While normal retirement age currently is 65, it increases gradually to 67 for those born after 1937, which, of course, includes you. If earnings are not an issue, collecting early makes sense for many people, particularly if your family medical history suggests you might have a shorter-than-average life expectancy. On the other hand, if all your relatives live to be at least 90, consider waiting to start collecting a higher benefit.
Q. My wife and I have a living trust and wills formulated by a Florida attorney. The attorney has since retired. Are these documents still good or must we process them through another attorney? A. A lawyer's retirement or death does not invalidate the legal documents he or she drew up. You don't say how old your documents are, but you might want to have another lawyer review them to see if they should be updated. You probably will need legal advice when it comes time to probate the will. If you think that time might be arriving in the next few years, it wouldn't hurt to establish a relationship now with another lawyer. Online money map-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731
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Times columns today Mary Jo Melone Jan Glidewell Ernest Hooper Hubert Mizell Darrell Fry Darrell Fry John Romano John Romano Helen Huntley Phil Gailey Bill Maxwell Martin Dyckman Robyn Blumner From the Times Business desk |
