shouldn’t buy a mutual fund near the end of the year

All mutual funds are required to distribute to their shareholders (that’s you) the capital gains they receive from selling stocks and bonds. That distribution usually takes place once a year, around December. (Dividends are usually passed along as they are received.) If you receive those distributions, you have to pay taxes on them. You pay those taxes even if you have been a shareholder for just one day, and even if you reinvest all the capital gains in additional shares. So, in order to avoid needlessly increasing your tax bill, don’t buy a mutual fund before it makes its year-end distribution.

Now, not every mutual fund makes its distribution year-end, so always find out when the fund you are considering is going to make a distribution, and how large it will be, before you buy. Of course, if you’re in a tax-advantaged account, such as an IRA, you don’t have to worry about this problem. You won’t owe any taxes until you start to withdraw your funds. One other thing to note: Some folks are tempted to sell their shares before the distribution. That is an option, but one that presents two potential problems:

- If you are investing for the long term, it doesn’t make much sense to sell less than a year after buying.

- The decision to sell could trigger an even bigger tax bill. As always, you don’t want the tail (taxes) to wag the dog (your investing strategy).

Know what your investing goals are, and then go from there.