Cutting Down on Capital Gains

Capital gains are typically the result of selling off good investments or assets that have increased in value. To your benefit, you can manage your capital gains and losses by determining the manner

in which you buy investments and when you elect to sell them. By minimizing capital gains you can also minimize the ensuing tax bite. One of the simplest ways to limit capital gains is to buy equities and hold them, thus not realizing the gains but keeping them on paper. Holding stocks over a period of time is typically good advice regardless of capital gains strategies.

Holding onto mutual funds, however, does not insure that you will be spared capital gains taxes. As the fund manager buys and sells within the fund, capital gains are generated and you may be taxed on the gains by the fund. Therefore, even if you do not sell the mutual fund shares you own, you may have capital gains taxes to pay.

To cut down on the capital gains generated by mutual funds you can purchase more aggressive mutual funds within your retirement plan, whereby they are tax deferred and not a problem in the immediate future. Then, in the non-retirement portion of your portfolio you can purchase the funds that do less trading, such as an index fund or a bond fund for the income. The capital gains generated through transactions within an index fund are minimal. Keep in mind that if you buy a mutual fund, it is also advisable to do so after the tax assessment is made. Otherwise, you can pay taxes on a mutual fund that hasn’t benefited you at all.