The Unique Tax Advantages of ETFs
ETFs are quite tax efficient. The way they are created and redeemed allows an investor to pay most capital gains taxes upon the final sale of the ETF. Obviously there is no way around paying capital gains, however delaying the payment of capital gains allows investors to use that money that would have been paid to taxes to compound and accumulate wealth.
How much any individual investor gains is dependant upon their marginal tax rate along with the rate of return of the investment and also how long they hold onto the investment. ETFs tax advantages are similar to those of tax managed index mutual funds. They are much more efficient than actively managed funds.
Taxation for typical mutual funds will take accumulated, unrealized capital gains liabilities from all stocks that have risen in value. When investors sell their stocks, the fund takes that calculated tax amount and distributes it proportionally among its membership. ETFs allow that money to be reinvested before paying a capital gain, allowing huge upside for wealth accumulation.
Both mutual funds and ETFs have modest distribution in comparison to actively managed funds. It's important to emphasize that ETFs have much less capital gains liability than do mutual funds. Funds tend to enforce tax payment the more turnover experience there is from trying to pick stocks.
An interesting detail that goes much unknown is that many mutual fund investors end up paying the bill for investors who evade the liability, especially in a soft market. Those who evade the taxes will sell their stock before the day of record and don't receive a bill while those loyal investors stay, and end up paying for the full liability. ETFs don't have that same downfall.
A regulatory loophole exists and ETFs are considered to be created by trading equivalent certificates called an in-kind trade. Because they seem like identical items, it does not trigger the IRS to charge a capital gain. Typical mutual funds, which exchange cash for stocks will trigger a capital gain, which creates an advantage for ETFs. - 23196
How much any individual investor gains is dependant upon their marginal tax rate along with the rate of return of the investment and also how long they hold onto the investment. ETFs tax advantages are similar to those of tax managed index mutual funds. They are much more efficient than actively managed funds.
Taxation for typical mutual funds will take accumulated, unrealized capital gains liabilities from all stocks that have risen in value. When investors sell their stocks, the fund takes that calculated tax amount and distributes it proportionally among its membership. ETFs allow that money to be reinvested before paying a capital gain, allowing huge upside for wealth accumulation.
Both mutual funds and ETFs have modest distribution in comparison to actively managed funds. It's important to emphasize that ETFs have much less capital gains liability than do mutual funds. Funds tend to enforce tax payment the more turnover experience there is from trying to pick stocks.
An interesting detail that goes much unknown is that many mutual fund investors end up paying the bill for investors who evade the liability, especially in a soft market. Those who evade the taxes will sell their stock before the day of record and don't receive a bill while those loyal investors stay, and end up paying for the full liability. ETFs don't have that same downfall.
A regulatory loophole exists and ETFs are considered to be created by trading equivalent certificates called an in-kind trade. Because they seem like identical items, it does not trigger the IRS to charge a capital gain. Typical mutual funds, which exchange cash for stocks will trigger a capital gain, which creates an advantage for ETFs. - 23196
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posted by X - Men @ 4:00 AM
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