• Matthew Davis, CFP®

End of Year Distributions

At the end of the year, it is common for us to get a call from a client wondering why a mutual fund dropped 10% in price often when the market has barely moved. This is a completely fair question and fortunately has a good explanation. We call these capital gain distributions and mutual funds often must pay them out by year-end.


It is important to remember that a mutual fund is a shared investment vehicle that holds many individual stocks, bonds, etc. Throughout the year, the mutual fund manager may be selling their positions and recognizing gains and losses. By year-end, a mutual fund might need to pay out a portion of its profits to its account holders.


If the mutual fund needs to pay out 10% of its value as a year-end capital gain distribution, you the fund owner will receive 10% of the fund’s value in cash. Here is a quick example:


Mutual Fund XYZ is planning on paying a 15% distribution by year-end. It is currently trading at $10 a share. You own 1,000 shares of XYZ.


Before the distribution: After the distribution:

1,000 shares @$10 $10,000 1,000 shares @ $8.50 $8,500

Cash $0 Cash $1,500

Total $10,000 Total $10,000


In the end, both totals are the same. One important consideration, however, is what the tax implication of these distributions are. They can be either a short-term (ordinary income) distribution, a long-term distribution, or some combination. If you hold the fund in a tax-deferred or a tax-exempt account such as a 401(k), IRA or Roth IRA, you do not need to worry. However, in a taxable account, you may want to defer purchasing the fund until after the distribution to avoid participating in the gain.

9 views

Addresses

2945 Townsgate Road Suite 200
Westlake Village, CA 91361

Email

info@sherwoodfp.com

Phone

805.870.5591

 

  • LinkedIn - White Circle
  • Facebook - White Circle
PledgeOneLogo Transparent (1).png

CONTACT US

Sherwood Financial Partners, LLC (“Sherwood”) is a registered investment adviser located in Westlake Village, California.  The publication of Sherwood’s website on the internet should not be construed by any consumer or prospective client as Sherwood’s solicitation or attempt to effect transactions in securities, or the rendering of personalized investment advice over the Internet.   The information on this Internet site should not be construed as the provision of personalized individual advice from Sherwood.    

A copy of Sherwood’s written disclosure statement as set forth on Form ADV, discussing Sherwood’s business operations, services, and fees is available upon written request.  Sherwood does not make any representations as to the accuracy, timeliness, suitability or completeness of any information prepared by any unaffiliated third party, whether linked to or incorporated herein. All such information is provided solely for convenience purposes and all users thereof should be guided accordingly. 
We are neither your attorneys nor your accountants and no portion of this material should be interpreted by you as legal, accounting, or tax advice.  We recommend that you seek the advice of a qualified attorney and accountant.  

 

ACCESS TO THIS WEBSITE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND WITHOUT ANY WARRANTIES, EXPRESSED OR IMPLIED, REGARDING THE ACCURACY, COMPLETENESS, TIMELINESS, OR RESULTS OBTAINED FROM ANY INFORMATION POSTED ON THIS WEBSITE OR ANY THIRD PARTY WEB SITE LINKED TO THIS WEBSITE.

©2020 by Sherwood Financial Partners