A very Merry Christmas to 401(k) participants! While their taxable account counterparts receive a big, fat lump of coal this holiday season, 401(k)s are thankfully insulated from the taxable distributions that are sure to come.
Mutual fund managers were forced to make moves to mitigate market volatility in recent months, resulting in taxable distributions to shareholders. A handful of mutual funds plan to make capital-gains payouts a high as 30% or more of their net asset values in December alone, The Wall Street Journal reports.
“When mutual funds sell securities in their portfolios, they are required to distribute the net gains to fund shareholders, who then may owe taxes on those gains if the shares are held in taxable accounts,” the paper notes. “Gains are nice if investors have been in the fund long enough to have benefited, but they can be painful at tax time: Rates on long-term capital gains can be as high as 23.8 percent.”
Mark Wilson, chief investment officer of Tarbox Group, a wealth-management firm in Newport Beach, California, reminds the Journal that “a fund has to have performed well to have embedded gains, but then when performance goes south, investors often sell. That leaves a smaller group of shareholders to share the burden of the fund’s capital-gains payout.
“It’s important to be aware of fund flows,” he concludes. “If a fund is losing assets, an actively managed fund has little control over what’s going to happen with distributions.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of 401(k) Specialist and Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots. Experienced financial services content executive specializing in creative new media delivery. He joined the American Retirement Association in 2023 as Chief Content Officer, overseeing communications for the organization, as well as its sister organizations.