Financial News You Use - mutual fund, capital gain distribution, Securities and Exchange Commission, investments, stock

<body bgcolor="#FFFFFF" topmargin="0" leftmargin="15" text="#000000"> <div align="center"><center><table border="0" width="450" cellspacing="0" cellpadding="5"> <tr> <td width="565"> <h1>SEC Issues New Tax Reporting Rules On Funds <br> </h1> <p> If you owned a stock mutual fund in a taxable account in 2000, there's a good chance you got hit by what might be called the mutual fund double-whammy. This is an unfortunate situation in which your fund's assets decline in value, plus you get socked with a taxable capital gain distribution. <br> Recently, the Securities and Exchange Commission adopted new rules to give investors better insight into this tax trap. All fund prospectuses issued after February 16, 2002, will be required to disclose a fund's after-tax returns. For fund advertisements that include performance data as well as ads for funds claiming to be tax-efficient, the deadline for disclosing after-tax returns comes earlier, on October 1, 2001. <br> Mutual funds are an inexpensive way to diversify your investments and get professional management of your money, but taxes are their weak suit. According to Weisenberger, a mutual fund data and research firm, the average domestic stock fund distributed 9.2% of its net asset value in 2000 while gaining a meager 0.89%. So, even though investors in a typical fund gained less than 1% in 2000, they got hit with a tax bill if they held that fund in a taxable account.<br> Stock mutual fund taxes are triggered in two different ways: If a stock in your fund's portfolio makes a dividend payment, the fund passes the dividend on to you, and you must pay tax on it at your ordinary income tax rate. If the fund owns bonds and collects interest, it's taxed the same way. <br> When your fund sells a stock at a profit, that gain also gets passed along to you. If the fund has held the stock more than 12 months, it's considered a long-term capital gain and you'll be taxed at a flat 20% capital gains tax rate. (You pay even less if your income tax bracket is 15% or lower.)<br> The double-whammy comes into play when a fund sits on its gains-as many did during the soaring bull market of 1999-but then sells stocks when the market levels off or declines, as it did in 2000. When investors see their gains eroding, many sell. Since a fund often keeps only 1% to 2% of its assets in cash, it may have to sell stock to pay exiting shareholders. If those shares are sold for more than the fund paid for them, it will then have to make a taxable distribution.<br> The new SEC rule requires funds to disclose their after-tax track record during the previous one-, five-, and 10-year periods. They'll use a standardized formula for the disclosure that assumes fund shareholders are in the 39.6% federal tax bracket, the highest possible. <br> Don Phillips, president of Morningstar Inc, a Chicago-based mutual fund tracker and research firm, considers the new disclosures a step in the right direction but worries that they could still leave investors somewhat confused. <br> "The new rule misses the point that taxes are ultimately an investor issue, not an investment issue," says Phillips. "The tax you pay on a fund is linked to your personal tax situation and not just to how the fund operates. Two shareholders in the same fund can have very different tax ramifications depending on their overall tax picture." For example, one investor might be able to offset gains in one fund with losses in another, whereas another might bear the full brunt of the distributions. <br> Another problem, according to Phillips, is that the new rules could push managers into ill-advised moves. If most of a fund's shares are held in 401(k) or other tax-deferred accounts, then the after-tax record of that fund is largely irrelevant. Yet it will still be required to disclose its after-tax record, and that could influence the manager's decisions. Phillips favors creating separate funds for fund owners with different tax profiles.<br> Finally, Phillips points out that a stock fund that has had a strong after-tax record in recent years may be more likely to make taxable gain distributions in the future. "A fund that has paid out a long-term gain in the recent past will look bad and yet it may be a better fund to own, as opposed to one with a lot of built-up gains, even though the latter looks good based on its after-tax disclosure," says Phillips. <br> <br> <br> <br> 3/28/2001<br> © Copyright AdvisorSites,Inc. 2001. All Rights Reserved.<br> <br> </p> <p>-------------------------------------------------------------------------</p> <p> </p> <p>--------------------------------------------------------------------------------<br> This article was written by a professional financial journalist for Chris Cooper & Company and is not intended as legal or investment advice. <br> </p> <p> </td> </tr> </table> </center></div><p align="center"><font size="1">© Copyright AdvisorSites Inc. 1998 All rights reserved.</font></p> <p><a href="f_whoweare.htm" target="_top">Who We Are</a></p> <p><a href="f_whatwedo.htm" target="_top">Financial Services</a></p> <p><a href="f_ourviews.htm" target="_top">Our Views</a></p> <p><a href="f_news.htm" target="_top">Financial News You Use</a></p> <p><a href="f_marketdatabank.htm" target="_top">Market Data Bank</a></p> <p><a href="f_calcsavings.htm" target="_top">Problem Solver</a></p> <p><a href="f_links.htm" target="_top">Links</a></p> <p><a href="f_contactus.htm" target="_top">Contact Us</a></p> <p><a href="h_quotes.htm" target="_top">Stock Quotes</a></p> <p><a href="f_account.htm" target="_top">Check Account</a></p> <p><a href="index.htm" target="_top">Chris Cooper Home</a></p>  <script language="JavaScript">  </script>  </body>