Financial Q&A: Mutual fund tax planning often begins with a phone call
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Q: I own a fund that distributes capital gains and a dividend once a year in December. For planning purposes, I'd like to know how I can estimate these payouts in advance. I assume that the fund manager knows how he is doing at any point during the year. But how do I find out? Should I make any assumptions about either the gains or dividend based upon the 40 percent price drop this year?
B.N., via e-mail
A: Give your fund company a ring very soon and see whether it has yet set a year-end payout (if there is any). Distribution amounts are generally determined at the end of each mutual fund's fiscal year, according to Sam Harris, of TFS Capital LLC, the Richmond, Va.-based manager of the TFS Market Neutral Fund.
Mr. Harris says that the administrator of each mutual fund evaluates transactions that have taken place in the prior year and quantifies the realized capital gains and dividends. By law, this money must be passed out to the shareholders of the fund within the calendar year.
Most funds provide estimates of the distribution amounts shortly after the end of their fiscal year – but ahead of the actual distribution date – so that shareholders and prospective shareholders can plan. For instance, says Harris, GE funds prominently displays its estimated distribution amounts on its website.
Generally, funds that performed poorly during a fiscal year will usually have lower distribution amounts. But Harris says that this is not always the case. For instance, if a manager only sold the few positions that gained in value, but held onto the vast majority of stocks that lost value, there would be an abnormally high distribution amount.
In addition, assets that flow into or out of a fund can also play a major role. Net inflows into a fund will dilute the distribution amounts, whereas net outflows will make them more concentrated.
Q: Housing an annuity that is tax-deferred within an IRA seems like a redundant move. Why would an adviser suggest this? If I moved an annuity out of an IRA would I incur a surrender fee? Without an Investment Protection Plan rider, would you have no guarantee that principal would remain intact, given market fluctuations?
P.F., via e-mail
A: A tax-deferred savings annuity, as the name implies, is in and of itself a tax-deferred retirement vehicle that doesn't need to be housed in an IRA to provide tax benefits, says Joseph Montanaro, a certified financial planner in San Antonio, Texas.
While there are very few benefits to using a variable annuity in an IRA, if you already have this arrangement, Mr. Montanaro says that it might be more attractive in light of what's happened with the stock market over the past year. Why? A variable-annuity contract or the riders that come with it typically afford the owner some type of protection of their principal investment – regardless of market results – in the event that he or she dies or decides to annuitize their contract (that is, turn it into a stream of income).
The key point right now is to take a close look at your annuity contract, consult with your agent or insurance company, and evaluate your options, which may be a lot more attractive than they were before the market headed south. You might be able to turn your annuity into a stream of income – one that's based on a value that is substantially higher than today's market value.