Know the tax consequences When you typically buy and hold an individual stock or bond in a non-retirement account [i.e., accounts that are not IRAs, SEPs, 401(k)s, etc.], you must generally pay income tax each year on the dividends or interest you receive. However, you won’t have to pay any capital gains tax until you sell and make a profit. Mutual funds are different. When you buy and hold mutual fund shares, you will generally owe income tax on any ordinary dividends in the year you receive or reinvest them. In addition to owing taxes on any personal capital gains when you sell your shares, you may also have to pay taxes each year on the fund’s capital gains. Bear in mind that if you receive a capital gains distribution, you will likely owe taxes—even if the fund has had a negative return during the year when you purchased your shares. For this reason, you should call the fund family or visit their web site to find out when it makes distributions, so you don’t pay more than your fair share of taxes. Don’t go it alone For many, the stakes are too high to develop an investment strategy on their own. That’s why millions of Americans rely on the services provided by a financial professional. While the use of a financial professional does not guarantee investment success, they have the experience and training to give you investment insight and guidance. A financial professional will work with you to outline appropriate investment options and to develop an investment strategy in line with your specific goals.
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