Smart Investors Can Dodge Year-End Mutual Fund Payouts with ETF Swaps
As the year draws to a close, savvy investors are taking steps to avoid the annual capital gains distributions from mutual funds. One clever strategy is to swap these funds for exchange-traded funds (ETFs), which typically don’t have an annual payout. This move can help reduce ongoing taxes and make annual tax projections more accurate.
Certified financial planner Tommy Lucas explains that certain investors can “capital gain harvest” by strategically selling profitable assets while in a lower tax bracket. This allows them to swap mutual funds for ETFs without triggering taxes. To take advantage of this tactic, investors need to track their earnings, including capital gains, throughout the year.
One key benefit of ETFs is that they don’t incur taxes from selling mutual funds if you’re in the 0% long-term capital gains bracket. For 2024, single filers with taxable income of $47,025 or less and married couples filing jointly with taxable income of $94,050 or less fall into this bracket.
CFP JoAnn May advises investors to carefully monitor their taxable income, as adding gains from mutual fund sales can impact their tax bracket. To avoid receiving the distribution, investors must sell their mutual funds before the record date, and mutual funds usually release estimates of year-end payouts before this date.
By making the switch to ETFs, investors can sidestep the capital gains payout for 2024 and beyond, making their annual tax projections more predictable. With the right strategy and careful planning, investors can minimize their tax liability and maximize their returns.
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