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If you’re bracing for year-end mutual fund distributions, swapping assets for exchange-traded funds could sidestep the capital gains payout for 2024 and beyond.
Some mutual funds distribute yearly capital gains to shareholders, typically in November and December. By comparison, most ETFs don’t have an annual payout, which helps reduce ongoing taxes.
Typically, investors incur capital gains when trading profitable mutual funds for ETFs in a brokerage account. But some investors can sell without triggering taxes, experts say.
Depending on their income, certain investors can “capital gain harvest” — strategically selling profitable assets while in a lower tax bracket — to swap mutual funds for ETFs, said Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.
With many tax breaks tied to adjusted gross income, experts recommend tracking earnings, including capital gains, throughout the year.
Eliminating year-end mutual fund distributions can make annual tax projections “much more accurate,” according to Lucas.
“It’s really nice to take the magnitude of that variable out,” he said.
The 0% capital gains bracket
You won’t incur taxes from selling mutual funds if you’re in the 0% long-term capital gains bracket, which applies to assets owned for more than one year.
For 2024, you’ll fall into the 0% bracket with taxable income of $47,025 or less for single filers and $94,050 or less for married couples filing jointly.
Taxable income is significantly lower than your total or “gross” income because the calculation subtracts the greater of the standard or itemized deductions from your adjusted gross income.
Trading mutual funds for ETFs in the 0% bracket “is a great idea if everything else lines up and you don’t have a lot of other income,” said CFP JoAnn May, the principal and co-founder at Forest Asset Management in Riverside, Illinois. She is also a certified public accountant.
But “you’ve got to watch [your taxable income] closely,” she said.
Of course, you’ll need to add gains from mutual fund sales when calculating your taxable income for the year.
Sell before the mutual fund’s record date
If you plan to swap mutual funds for ETFs, you need to sell before the mutual fund’s record date, or “date of record.” Otherwise, you’ll still receive the distribution, even if you sell before the payable date.
Plus, mutual funds typically release estimates of year-end payouts before the record date, so you can see approximately how much you’ll receive, May said.
