Mutual Fund Transfers

Over the years, many clients have come in for their annual meeting. I often ask them if they sold any mutual funds. Quite often they say, "No." As I proceed to look through their papers, I see the statement from the stock broker indicating that there was, in fact, a sale.

I will typically pass the statement from the broker across the table, and they will tell me they never "sold" the mutual fund. They just made a telephone transfer from one mutual fund to another in the same family of funds. This happens quite often when one fund is not performing as expected, and the client is looking for a better return.

Most people tend to think of a mutual fund as a bank account. However, you are really purchasing a share in a group of assets. You own shares in the fund, and then the fund invests in various assets including stocks, bonds or money market investments. If you take the time to read your statement, you will notice that the value of the shares moves up or down on a regular basis depending on what the underlying assets are doing on any given day. When you own shares in a mutual fund, you receive an equity position (own a share) in each of the underlying securities.

For tax purposes, since you own a share in the underlying stocks, you are considered to have a sale when you move your money from one fund to another. At that point, you will have to calculate your gain or loss on the sale of your shares. If you are not aware that you had a sale, you can end up with a nasty surprise at tax time when you suddenly have a lot of unexpected gains on your tax return. If you do not report the sale of the mutual fund, you can rest assured that you will receive a friendly letter from the IRS informing you that you now owe them a fortune. The brokers ALWAYS report the sale of the funds to the IRS.

If you own any shares in mutual funds, you need to keep very careful and complete records. You need to keep the records showing the purchase and any dividends you received over the years. If you still have mutual funds today that you purchased in the 1970's, you still need to retain those records. So, if you hold the mutual fund for 30 years, you need to keep those records the entire time you own the fund (and then some!). Failure to keep the records will most likely result in paying taxes twice on the same earnings. This can get particularly complicated when mergers and acquisitions take place with the different stock brokers. It appears that many times, the records with the broker get lost if the broker changes names.

If you are contemplating a large sale of a mutual fund, we should do some tax calculations and planning before the sale to see your potential tax impact. Many times, these sales can throw you into the dreaded Alternative Minimum Tax and produce some nasty results. With a little bit of planning the bad results can be avoided or minimized.