Mutual Funds Vs. Exchange Traded Funds
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by: MattCBA
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This year’s been a little bit frustrating for investors. The sideways movement of the market obviously isn’t what any of us want. And if you have money in mutual funds, you may very well find yourself in a situation where your mutual fund is showing flat returns, and maybe even a modest loss for the year — but at the end of the year or next year, you’re going to get a 1099 showing a capital gain!
That’s one of the disadvantages of mutual funds. They have to report and distribute capital gains by year-end – it’s just the internal activity going on in the mutual fund. So even if you haven’t sold your shares, if there have been capital gain activities or capital gains in the fund, you’re going to have to pay tax on those gains even though you personally may show little or no profit.
That’s one reason why we think ETF’s (Exchange Traded Funds) provide a better tax planning opportunity. With ETF’s, you got investment diversification that’s similar to a mutual fund, but when it comes to taxes, it’s treated more like a stock. You don’t pick up a gain or a loss on your Exchange Traded Fund until you actually sell the fund. So that gives you better control of your individual tax situation.
So as we head in towards the end of the year, and end of year year-end tax planning, this is something to think about. It could be time to re-think your investment strategy. If you’ve got money in mutual funds know and understand what the capital gain distribution is going to be, you may find that that distribution is going to far exceed what your gains are for the year — especially in a year like we’ve just gone through.
If you’re not already using Exchange Traded Funds, that’s something that you want to look into, for now and for the future.
About the Author
About Brian L. Fricke, CFP®: Brian Fricke is the Author of “Worry Free Retirement, Do What You Want, When you Want, Where You Want”. For the last 6 years in a row Brian and his company – Financial Management Concepts – have been named one of America’s Top Wealth Managers. Orlando Business Journal has named his firm one of the top financial planning companies in Central Florida. Financial Advisor magazine – an industry trade journal- has recognized him as one of the leading financial planning firms in America. If you’ve been in Central Florida over 10 years, you may have heard him on the radio. He used to host his own show on WDBO radio. He’s also served on the City of Winter Springs Board of Trustees Pension Fund. Brian is a Certified Financial Planner. His firm – Financial Management Concepts – is a Fee Only Financial Planning firm. They currently manage over $98 million of investment assets for a select community of clients. Brian and his team have worked with retirees and pre-retirees from companies like AT&T, Sprint, Harris, Lockheed Martin and Siemens/Westinghouse. For more information, please visit http://www.BrianFricke.com
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