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Don't let year-end payouts catch you by surprise

Posted by Jill Boynton  November 28, 2008 09:30 AM

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Those of you who have been brave enough to look at your account statements in the past few months are probably looking at steep unrealized losses. Keep in mind that unrealized, or paper losses, are just that - they are on paper only and don't have to become "real" losses until you sell the security. Becoming panicked about the market and selling now is ultimately a bad move for your long-term investment plan. However there is one circumstance in which selling to realize some of your losses can help you out.

Most mutual funds that own stocks wait until the end of the year to pay out all the dividends and capital gains that have been accumulating as the fund manager bought and sold stocks during the year. Many mutual funds, even though they are down significantly, are planning to make capital gains payouts this year. These gains will be taxable to you if you own the fund in a taxable account, such as an individual, joint or trust account.

You can avoid these payouts by selling the mutual fund before the gains are paid. If you are selling the fund at a loss, not only will you avoid the year-end payout but you will also generate a loss that you can use on your tax return. Alternately you can sell any other security in your account that has a loss and offset the capital gains you expect to receive.

First, any tax loss you generate is used to offset any gains you've generated during the year. If you have additional losses, you can use up to $3,000 to offset ordinary income. Any losses beyond that can be carried forward to future tax years until they are used up.

Check the website for each of your mutual fund holdings to look for estimated year-end payouts as well as the "record date", or date which you must sell before to avoid the payout. Not all fund companies post the estimates, although many do.

One caveat - be sure you don't buy the same fund within 31 days before or after the sale, or you will not be allowed to deduct the loss. This is called the "Wash Sale Rule." Your choice is to wait 31 days and buy back the same fund, or buy a similar but different mutual fund (but be sure to note when that fund is making it's year-end payout before you purchase it.) For a more in-depth explanation of the wash sale rule click here:

This blog is not written or edited by or the Boston Globe.
The author is solely responsible for the content.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.

About the contributors

D. Abraham Ringer is a CERTIFIED FINANCIAL PLANNER practitioner and a Financial Adviser with Morgan Stanley Global Wealth Management in Boston. He is registered in MA, NH, NY and several other states to which his articles are directed. For more information please visit
Financial Planning Association™ of Massachusetts has 900 members who specialize in the financial planning process. Many of its members engage in philanthropic pro bono work in their communities, recommend legislation, elevate public awareness, promote financial literacy, and advocate for sound economic and tax policies.
Odysseas Papadimitriou is the founder of, a credit card and gift card marketplace, and, a personal finance site. He has more than 13 years of experience in the personal finance industry, and previously served as senior director at Capital One.

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