Your Money : SPOTLIGHT ON TAXES : Wait Until After Mutual Fund Record Date to Purchase

Consumers who buy new mutual fund shares before the end of the year could find themselves in a disagreeable situation come April 15.

That’s because of the capital gains taxes shareholders have to pay on dividends and other distributions mutual funds make. Since most mutual funds have record dates in December, buying into a mutual fund now can make taxpayers liable for a whole years’ worth of gains, even though they’ve only held the fund a few weeks.

One solution is to check out a fund’s record date before buying, and not buy when a record date is too near, said John Woerth, a spokesman for Vanguard Group, which manages assets of some $130 billion. Another is to buy mutual funds like Vanguard’s Tax-Managed Fund, which takes into account the tax ramifications of a successful mutual fund investment.

“Lots of funds distribute capital gains at year-end, so wait until after the record date to buy,” Woerth said. “It doesn’t make sense to buy a week before, because you can pay capital gains taxes on the whole year’s performance even though you’ve only been in the fund for a few days.”

Investors often overlook taxes when seeking high returns from their mutual fund, Woerth said.

“A fund that generates lots of capital gains may not be a top performer when adjusted for taxes,” he said. “The new thing are funds that are tax-advantaged, and that could be the difference between the performance and what investors actually get to keep.”

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