4 Investor Choices
Generally speaking, you have 4 options:
- Take the cash distribution
- Reinvest the money in the fund
- Sell shares before the distribution
- Sell the fund and buy back in a tax-deferred account
If you find the tax hit could be pretty big, for example, over 30% of NAV payout, then it's probably time to sell your fund before year end. If you wait till next year, you may find yourself in a very bad situation - you have to pay capital gain tax for 2015, but the loss in 2016 couldn't be used to offset such a gain.
What're the important lessons to learn from such a fund tax hit?
1. For taxable investment accounts, it's best to hold index funds or ETFs which tend to be more tax efficient and have low taxable payouts.
2. For actively managed mutual funds or other investments with large payouts, it's best to hold them in a tax-sheltered account such as a regular IRA, Roth IRA, or 401(k) account.