As we wind down 2021, as with every year in the Financial Planning business, we assess year-end financial needs and procedures to minimize taxes and to prevent penalties. One of our unique challenges for 2021 is the reinstatement of Required Minimum Distributions (RMDs), which were eliminated last year due to the pandemic. Aside from being easy to forget the RMD requirement following a year’s reprieve, Congress made rule changes that affect investors of certain ages.
One constant, however, is that failure to comply with RMD rules will result in tax penalties of 50% of the RMD value not taken. Something that has changed is the nationwide labor shortage of workers in nearly every business. Financial custodians are not exempt from labor shortages, so transaction requests (including RMDs) should be filed early this year.
Upon receiving money from RMDs, many investors purchase additional investments in (taxable) brokerage accounts. Anyone with mutual funds in a taxable account needs to be aware of certain dates announced annually by the fund. By law, dividends, interest, and capital gains earned in the fund must be distributed to shareholders at least annually. This normally happens late in the year, and important dates to remember can be found on the website of the fund or the fund family.
Distributions are taxable events, whether paid in cash or reinvested in more shares of the fund. “Buying a Dividend” refers to the purchase of mutual fund shares shortly before the distribution is made. Distributions do not create value, as the gains have already been built into the share price. Investors who purchase new shares prior to the Ex-Dividend Date will receive the Distribution. For many investors, those Distributions will be unwanted due to taxes. It is up to the investor to avoid this situation by delaying the purchase until at least the Ex-Dividend Date, which is the first day the purchaser will not be entitled to this year’s Distribution.
Due to excellent market conditions this year, Distributions are expected to be larger than normal.
For example, we checked Oakmark Funds for 2021, and found the ex-Dividend Date is 12/16/21, and the Pay Date is 12/17/21. Distribution amounts have not yet been announced. Whatever the amount of the Distribution, it will be taxable to owners prior to the Ex-Dividend Date. If this would negatively affect your tax situation (Tax-Deferred Retirement Accounts are not affected), delay the purchase until at least the Ex-Dividend Date.
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