Avoiding taxes in the short term
Financial experts agree that investing in mutual funds through IRAs and other tax-deferred retirement accounts is a smart long-term move. After all, Uncle Sam only takes a bite after you start making withdrawals.
But what about investors who own average, everyday mutual funds? They must pay taxes on their gains each year. In fact, 2.5 percent of all mutual-fund returns go toward taxes, says Meg Pier, spokeswoman for Eaton Vance Management, in Boston.
Yet mutual-fund investors can avoid annual taxes without going into a retirement account. Consider a tax-efficient fund. Managers of such funds avoid gains by taking a buy-and-hold approach. When they do profit from selling a stock within the fund, they try to offset that gain by selling a poor performing stock at a loss.
Tax-efficient funds might be of interest to investors, especially considering that an Eaton Vance survey released earlier this month found that 8 in 10 investors said taxes on their stock mutual-fund returns are important. Yet only 20 percent of investors said they were familiar with tax-managed funds.
Many of those surveyed showed a lack of understanding of such funds. The majority of investors said they would be more inclined to hold a tax-managed fund in a tax-deferred retirement account than outside such accounts. Talk about redundancy!
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