According to Lipper, an investment research company, mutual fund investors paid over $15 billion in federal income taxes as a result of fund performance in 2005. That was a 58 percent increase from 2004.
For the past 10 years, through 2005, pretax stock fund results were about 8.5 percent a year, pre-tax, but less than 6.8 percent, after-tax. Thus, stock fund investors lost 20 percent of their returns to the IRS, on average. Counting state and local income taxes, many investors took home even less from mutual funds.
The lesson?
* Your primary focus in mutual fund selection should be a search for returns, relative to the risks involved.
* Nevertheless, tax-efficiency should be a secondary concern. Before you invest in a mutual fund for a taxable account, check on a fund’s tax-efficiency.
