Ask a Trust Officer: Mutual Fund Distributions

Dear Trust Officer: I bought shares in a mutual fund last summer and now I’m getting a distribution of capital gains from the fund.  Why?  I don’t want that.  Do I have to pay taxes on it?

Buyer and Holder

DEAR BUYER AND HOLDER:

Federal law requires mutual funds to distribute nearly all of their realized capital gains to their shareholders.  Fund managers may try to offset gains with capital losses, but in this long bull market, that may be easier said than done.  When investors sell their shares in a fund, the managers must sell assets to meet the redemption, and that may generate the realized gains.

This year it is expected that mutual funds will pay out roughly 10% of their net assets to their shareholders.  This is not a function of how well the fund performed, it is a function of how many gains they realized during the year.  Assets held for a long period may show a gain even in a down market.

Yes, you will have to pay taxes on the capital gain.  You may reinvest the distribution in the fund if you wish.  The only exception to the need to pay taxes is if the fund is held in a tax-deferred retirement account.  Then you won’t owe anything until withdrawals begin, and they will be taxed at ordinary income rates.

Do you have a question concerning wealth management or trusts?  Send your inquiry to  mlinsner@tckansas.com.