Retirement & Financial Planning Report

Mutual fund investors are looking at severe losses in 2008–and they may be looking at unexpected tax obligations, too. That’s because many funds will make capital gains distributions in late 2008. Those distributions are taxable, if you hold the fund in a taxable account rather than in an IRA.

Sell side: If you plan to sell mutual funds (perhaps to realize a capital loss in 2008), sell your shares before the record date of the capital gains distribution. Check your fund’s website to determine the record date and sell before then, to avoid the taxable distribution. 

Buy side: After selling a mutual fund at a loss, you may want to reinvest in a different fund. However, you should be patient. Wait until after the taxable distribution from the new fund; if you invest before then, you’ll receive the distribution and the tax bill that goes with it.