Switching Funds Can Bring on Taxes
Retirement planning is important and making changes to your portfolio to maximize your investments may be advisable, but it may also bring on some unexpected taxes.
Many mutual fund companies allow you to switch mutual funds within a family of funds without a penalty or commission. Their interest is in keeping you as a client. Sounds fair, right? but there's a catch. Unless the funds are in a tax-deferred retirement account, you could owe income tax each time you make a switch. While you may consider this a simple paper change on your retirement funds statement, the IRS considers it a sale. You've sold shares in the first fund, then reinvested the proceeds in the second. As a result, you'll owe income tax on any gain.
When considering changes to your funds mix, remember that Uncle Sam may have his hand out at tax time.
To discuss the tax implications before making a switch, give Dugan & Lopatka a call.