Did you get the shock of your life when your accountant told you that you had to pay taxes on a mutual fund that lost money? If so, you are one of millions of people that get a rude awakening every year about just how poor an investment tool managed mutual funds really are.
Aside from giving you the worst ROI of any stock type, rest assured that mutual funds are actually worse than penny stocks owing to the fact that with mutual funds, your ability to control your tax liability is actually in someone else’s hands.
How Mutual Funds Increase Your Tax Burden?
Consider a situation where you decided to invest in a promising mutual fund that your stock broker recommended. As you may be aware, the mutual fund manager has the option to change all or some of the stocks in the portfolio whenever they please.
For the sake of argument, let’s say the manager decided to turn over the portfolio four times in one year. From there, let us say that changes two and four led to serious losses that led to a complete loss of your investment.
While you may not realize it, your tax liability went up each time the mutual fund manager changed the portfolio. No matter whether you made a profit or not, you still wind up paying tax.
What Do you Know About Eliminating Mutual Fund Taxes?
For some people, getting away from mutual funds is hard because they don’t want to be involved in picking specific companies to invest in.
At the very least, if you want to stay with mutual funds, then put them in an IRA. From there, no matter how many times the manager changes the mutual fund; you will not be taxed for it.
Needless to say, if you have other plans for using your profits, it is truly best to look for a stock type that will not incur so many taxes.
How To Replace Managed Mutual Funds With Index Stocks to Reduce Tax Burden?
As you may be aware, Index Stocks are essentially investments made based on certain criteria. You may select an index that matches the profile of dozens or even hundreds of companies and make a profit even if a few of the companies take a loss.
In addition, if your index does well, you can simply choose to hold onto it for more than a year before selling it off. This will allow you to pay the lowest possible interest rate on your gains, and also the ability to choose when those taxes get paid.
If you take a loss, then you will not have to pay taxes on the index at all.
When it comes to brutal tax burdens, there is no question that stock investors routinely get the worst treatment.
If you are drawn to mutual funds because they seem easier, you will be far better served by investing in index stocks instead. At the very least, you will not have to put all your gains into a retirement account just to avoid paying taxes on mutual funds that take a loss.