Why Do Taxes Matter?
Some people base their choice of a mutual fund on advertised returns, which usually do not take taxes into account. However this strategy can backfire. A fund pays out some or all of its earnings and profits to shareholders in the form of distributions. You must pay taxes on those distributions, reducing the advertised return to an after-tax that will vary, depending on your tax bracket. For example, let’s assume that you owned shares in a fund with a total pretax return of 10%. If you gave up 3% to taxes, you would get to keep only 70% of your fund’s gains. The chart below illustrates what most newspaper mutual fund advertisements do not tell you. It looks at the after-tax results for investors in three different tax brackets. Each is invested in the same three funds, but each see different results.
