Connect:

Capital Gain Distributions on Mutual Funds, What You Should Know

By William Puduski, Newburyport.com Correspondent
Will Puduski is a Financial Advisor and Partner for Seacoast Wealth Management of Steward Partners located in Portsmouth, New Hampshire. Will has spent the last 4 years working alongside his team after spending 2 years with Northwestern Mutual. His role is centered around the development and implementation of financial planning strategies for high-net-worth individuals, families, and business owners, as well as managing their corporate retirement plans. Will and his team work with clients first by understanding their financial situation, goals and aspirations, then develop a plan centered around the fundamentals of asset allocation and risk management. Through an ongoing relationship they monitor their clients’ investments and goals, helping them pursue their financial future. Will graduated magna cum laude from The University of Massachusetts, Lowell, with a Bachelor of Science degree in business administration and finance, while serving as a three-year captain on the Universities’ Division 1 Men’s Lacrosse team. Most recently, Will earned the Accredited Asset Management Specialist (AAMS) designation from the College of Financial Planning. Outside of work, Will values spending time with his family and friends; he values their relationships and enjoys the activities that bring them together. Some of those activities include fishing, boating, cheering on the Patriots and volunteer coaching for the Portsmouth High school Boy’s Lacrosse team.
Seacoast Wealth Management of Steward Partners
Capital Gain Distributions, Mutual Funds, Newburyport

In a year where most asset classes have seen significant losses, it is hard to comprehend a mutual fund paying out a capital gain at the end of this year. With clients holding mutual funds in a taxable account, this can be especially bothersome as this can generate a taxable event for the shareholder in a year where many funds are down year-to-date. In today’s article, we will dive into how a mutual fund is structured, why these distributions have been paid out this year, and what this means for your account.

A mutual fund is an investment vehicle constructed by an investment company where a portfolio manager, along with their team of analysts and traders, buy and sell underlying securities with a particular objective in mind. Objectives may include strategies such as market cap-specific (large, mid, or small cap companies), fixed income objectives (tax-free municipal strategies, high yield, or investment grade), themes (sector-specific, value, or growth) or even a mix of all at different weightings.

With each specific fund and objective, underlying securities are traded by managers, creating capital gains and losses inside the fund. By law, the fund must pay out 90% of dividends (from the underlying stocks) and realized gains to shareholders annually. Given the volatility we have seen this year, portfolio managers may have traded excessively to keep up with this year’s dynamic market and to meet outflows from their funds as investors liquidate and allocate to cash. In a situation where fund outflows have surpassed inflows (like we have seen in many funds this year), portfolio managers can be forced to sell securities to meet those outflows, thereby creating capital gains and losses.

If there is a net gain from all the securities sold that year to make up redemption requests, these gains will have to flow to the shareholders. Mutual funds will then post a capital gain distribution at the end of the year to comply to regulations and make up for the trading and shifts in the portfolio. In turn, this can create a taxable event for the shareholder regardless if they hold the fund at a gain or loss.

The bad news? During years like 2022, investors can potentially pay capital gain tax on mutual fund positions they hold in taxable accounts. The good news? With proper financial planning and tax planning, these capital gain distributions can be avoided or mitigated. If you haven’t planned for potential capital gain distributions in your taxable accounts, please reach out to our team for a no-cost portfolio consultation.

We can be reached here:

Seacoastwealthmangement@stewardpartners.com

603.427.8855

William Puduski
Partner, Vise President

Steward Partners Investment Solutions, LLC (“Steward Partners”), its affiliates and Steward Partners Wealth Managers do not provide tax or legal advice.  You should consult with your tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.

AdTrax 5196860.1  Exp 11/24

Retirement Planning: Estimating Your Retirement Income Needs

By Gary Walker, Newburyport.Com Correspondent
Gary Walker serves as New England Sales Director, Founding Partner and Wealth Manager for Seacoast Wealth Management of Steward Partners located in Portsmouth, New Hampshire. Gary brings 20 years of experience in creating financial planning strategies, asset allocation models as well as support with corporate retirement plans. Gary’s practice focuses primarily on high-net-worth individuals and families as well as business owners. Gary works with clients by first listening to clients’ financial situation, goals and aspirations. He then assists clients in designing a long-term investment plan based on the fundamentals of asset allocation, and provides guidance in choosing investments best suited for a client’s needs. Gary earned his BS in Accounting and Finance from Worcester State College. He also earned the designation of Chartered Retirement Plans Specialist (CRPS) from the College of Financial Planning. Gary, his wife Kim and two children, Grayson and Kolby, reside in Kensington, New Hampshire. In his free time, he enjoys golfing, fishing and volunteer coaching for youth sports.
Seacoast Wealth Management of Steward Partners
Retirement Planning, Retirement Income Seacoast Wealth Management , Seacoast NH & North Shore MA

At Seacoast Wealth Management of Steward Partners, our practice is built on the fundamentals of retirement planning and overall financial planning. It is our view, that any sound investment strategy must be aligned with a client’s retirement goals, that are measured by clearly defined retirement income and retirement expenses, to help ensure they have a high probability of success in reaching them. At the start of any new relationship, we will carefully assess the factors outlined below as they are critical in developing an investment allocation customized for a client’s unique situation.

You know how important it is to plan for your retirement, but where do you begin? One of your first steps should be to estimate how much income you’ll need to fund your retirement. That’s not as easy as it sounds, because retirement planning is not an exact science. Your specific needs depend on your goals and many other factors. At Seacoast Wealth Management, our financial advisors work with many clients in Seacoast NH and North Shore MA, Boston and beyond to define these important details in effort to build a measurable retirement plan.

Use your current income as a starting point

In your retirement plan, it’s common to discuss desired annual retirement income as a percentage of your current income. Depending on whom you’re talking to, that percentage could be anywhere from 60% to 90%, or even more. The appeal of this approach lies in its simplicity, and the fact that there’s a common-sense analysis underlying it: Your current income sustains your present lifestyle, so taking that income and reducing it by a specific percentage to reflect the fact that there will be certain expenses you may no longer be liable for (e.g., payroll taxes, dependents, mortgage payments) will, theoretically, allow you to sustain your current lifestyle.

The problem with this approach is that it doesn’t account for your specific situation. If you intend to travel extensively in retirement, for example, you might easily need 100% (or more) of your current income to get by. It’s fine to use a percentage of your current income as a benchmark, but it’s worth going through all of your current expenses in detail, and really thinking about how those expenses will change over time as you transition into retirement.

Project your retirement expenses

Your annual income during retirement should be enough (or more than enough) to meet your retirement expenses. That’s why estimating those expenses is a big piece of the retirement planning puzzle. But you may have a hard time identifying all of your expenses and projecting how much you’ll be spending in each area, especially if retirement is still far off. To help you get started, here are some common retirement expenses:

  • Food and clothing
  • Housing: Rent or mortgage payments, property taxes, homeowners insurance, property upkeep and repairs
  • Utilities: Gas, electric, water, telephone, cable TV
  • Transportation: Car payments, auto insurance, gas, maintenance and repairs, public transportation
  • Insurance: Medical, dental, life, disability, long-term care
  • Health-care costs not covered by insurance: Deductibles, co-payments, prescription drugs
  • Taxes: Federal and state income tax, capital gains tax
  • Debts: Personal loans, business loans, credit card payments
  • Education: Children’s or grandchildren’s college expenses
  • Gifts: Charitable and personal
  • Savings and investments: Contributions to IRAs, annuities, and other investment accounts
  • Recreation: Travel, dining out, hobbies, leisure activities
  • Care for yourself, your parents, or others: Costs for a nursing home, home health aide, or other type of assisted living
  • Miscellaneous: Personal grooming, pets, club memberships

Don’t forget that the cost of living will go up over time. The average annual rate of inflation over the past 20 years has been approximately 2%. And keep in mind that your retirement expenses may change from year to year. For example, you may pay off your home mortgage or your children’s education early in retirement. Other expenses, such as health care and insurance, may increase as you age. To protect against these variables, build a comfortable cushion into your retirement plan estimates (it’s always best to be conservative). Finally, have a financial professional help you with your estimates to make sure they’re as accurate and realistic as possible.

Decide when you’ll retire

To determine your total retirement planning needs, you can’t just estimate how much annual income you need. You also have to estimate how long you’ll be retired. Why? The longer your retirement, the more years of income you’ll need to fund it. The length of your retirement will depend partly on when you plan to retire. This important decision typically revolves around your personal goals and financial situation. For example, you may see yourself retiring at 50 to get the most out of your retirement. Maybe a booming stock market or a generous early retirement package will make that possible. Although it’s great to have the flexibility to choose when you’ll retire, it’s important to remember that retiring at 50 will end up costing you a lot more than retiring at 65.

Estimate your life expectancy

For retirement planning purposes, the age at which you retire isn’t the only factor that determines how long you’ll be retired. The other important factor is your lifespan. We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. You may even run the risk of outliving your savings and other income sources. To guard against that risk, you’ll need to estimate your life expectancy. You can use government statistics, life insurance tables, or a life expectancy calculator to get a reasonable estimate of how long you’ll live. Experts base these estimates on your age, gender, race, health, lifestyle, occupation, and family history. But remember, these are just estimates. There’s no way to predict how long you’ll actually live, but with life expectancies on the rise, it’s probably best to assume you’ll live longer than you expect.

Identify your sources of retirement income

Once you have an idea of your retirement income needs, your next step is to assess how prepared you are to meet those needs. In other words, what sources of retirement income will be available to you? Your employer may offer a traditional pension that will pay you monthly benefits. In addition, you can likely count on Social Security to provide a portion of your retirement income. To get an estimate of your Social Security benefits, visit the Social Security Administration website (www.ssa.gov). Additional sources of retirement income may include a 401(k) or other retirement plan, IRAs, annuities, and other investments. The amount of income you receive from those sources will depend on the amount you invest, the rate of investment return, and other factors. Finally, if you plan to work during retirement, your job earnings will be another source of income.

Make up any income shortfall

If you’re lucky, your expected income sources will be more than enough to fund even a lengthy retirement. But what if it looks like you’ll come up short? Don’t panic — there are probably steps that you can take to bridge the gap. A financial professional can help you figure out the best ways to do that, but here are a few suggestions:

  • Try to cut current expenses so you’ll have more money to save for retirement
  • Shift your assets to investments that have the potential to substantially outpace inflation (but keep in mind that investments that offer higher potential returns may involve greater risk of loss)
  • Lower your expectations for retirement so you won’t need as much money (no beach house on the Riviera, for example)
  • Work part-time during retirement for extra income
  • Consider delaying your retirement for a few years (or longer)

In any retirement plan, there are many variables to consider and assets to account for. From our experience, we have found that individuals that engage with a trusted financial advisor have a much higher probability of having a successful retirement. If you feel you would benefit from a free financial planning consultation to cover some of the aforementioned topics, please reach out to us here.

The views expressed herein are those of the author and do not necessarily reflect the views of Steward Partners or its affiliates.  All opinions are subject to change without notice.  Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.  Past performance is no guarantee of future results.

Although Seacoast Wealth Management of Steward Partners has compensated Newburyport.com to have this advertisement featured in its website, this is not a solicitation nor intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors. You should consult their tax advisor for matters involving taxation and tax planning and their attorney for matters involving trust and estate planning and other legal matters.

AdTrax 4939183.2  Exp 9/24

Skip to toolbar