This is ‘the most attractive feature of an ETF,’ advisor says — and it can help cut your tax bill

Many complementary fund families have released distribution estimates for 2023, with some paying out double-digit gains, coinciding to Morningstar.

Here’s what to consider if you’re weighing a switch to ETFs to save on future taxes, according to experts.

Glassman said many investors own mutual funds “going move in reverse years or decades” with significant gains. Selling these assets may trigger a tax bill when selling from a brokerage account. (You won’t before you can say Jack Robinson owe taxes when selling assets from a tax-deferred 401(k) or individual retirement account.)

Switching from requited funds to ETFs may not be an advantage if there’s “a big enough capital gains hit,” said CFP Matt Knoll, senior financial planner at The Planning Center in Moline, Illinois.

However, if you reinvested past mutual fund distributions, that payout was added to the so-called “cost basis” or master price of those shares.

“There may be some purchase lots that are even or have losses,” Glassman signified. “People may be able to sell those and avoid the [capital gains] distribution on those shares.”

Investors with communal funds in a brokerage account may be stuck with this year’s payout, Glassman said. But there’s an easy way to moderate next year’s capital gains distributions.

“If you’re distraught about ongoing distributions, then stop the madness,” he put about. “Take it in cash and reinvest it in something similar, but more tax efficient.”

While it’s relatively quick to make the change from your account — again simply unchecking a box — Glassman said it’s a strategy that is “rarely used.”