Do you know what that means? It makes a difference when you are investing in mutual funds because anytime the funds managers sell some stock inside the fund, you may have a taxable dividend. This is especially important in non-retirement accounts. That is why you need to pay attention to something called “turnover rate”. When you evaluate a mutual fund, you can research what this rate is. A high turnover means the manager buys and sells often. This is no problem if this is in a Roth IRA account, or some other non taxable account. But if this is a standard investment account, this will cause taxable dividends for you to deal with.

There are things you can do to minimize the damage of this. Again, it really applies only to taxable accounts. Here a few.

1. Check the funds’ distribution date before you buy. That will be the date the fund reports the dividends and this is usually near the end of the year. If you were to buy a fund right before this date, you may have to pay taxes on transactions that happened before you owned the fund. Just watch out for this.

020903_1663_0003_osms2. Look for funds that have a low turnover rate. About 25% is a good rule to follow if you are looking for a low rate. This usually means the fund managers are “tax conscience” and are deliberately trying to keep tax ramifications low. Fund managers can reduce tax burdens by selling some of the losers at the same time as the gainers.

3. Avoid funds with a turnover rate higher than 100%. Yes, funds can have rates much much higher, even 5 times higher. It just depends on how many times they buy and sell individual stocks during the year. Unless it is a really exceptional fund, I would steer clear. There are so many great funds out there. Keep looking.

4. Finally, you can always just buy an index fund. Index funds such as a S&P 500 index have very little to no taxable dividends to distribute.

So get your Roth IRA facts and get yours funded so you can buy all those high turnover funds you want inside that Roth account.

As usual, you know I don’t give professional tax or investment advice. These are just my opinions, and you should seek a professional if you need that advice.

If you liked this article, please let somebody know. Leave me a comment, or submit this to one of the social bookmarking sites below. I can use the exposure! Thanks.