Nobody wants to pay any more in tax than they have to. But toward the end of the year, a big tax trap looms for unsuspecting investors, and if you don't use one simple strategy to avoid it, it can cost you a huge amount in additional tax.
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, discusses the tax trap that mutual fund distributions bring to taxpayers at year-end. Dan notes that because funds are required to distribute their income and capital gains, they can catch unsuspecting fund shareholders by surprise. Especially after long bull markets, funds are more likely to make big taxable distributions.
Dan discusses a recent Morningstar finding that T. Rowe Price (TROW -0.56%), Janus Capital (JNS), and BlackRock (BLK 1.08%) could have several funds with large distributions, because of recent changes in fund management or strategy that required big changes to their portfolios. He concludes with the easy solution that fund investors can use to avoid getting in tax trouble with such funds.
