Are you missing out on tax-free income?


A mutual fund is an investment company that pools the money of hundreds and even thousands of investors and purchases (invests) financial instruments such as stocks, bonds, and other types of securities. Investment professionals known as money managers or portfolio managers determine what stocks, bonds, and/or other financial instruments in which to invest.

In addition to the professional management of portfolio managers, mutual funds also provide diversification (you’re not putting you eggs in one basket) because your money is spread among dozens, if not hundreds, of companies. A mutual fund can be invested in all stocks, all bonds, or any combination of the stocks and bonds and other securities.

The 401(k) plan is the most common type of employer-sponsored plan in the marketplace and the most common investment option available in 401(k) plans is mutual funds. Mutual funds may be the default option provided by 401(k) and other types of retirement plans, but not may be top of mind when it comes to saving for retirement outside of a retirement plan.

One reason to consider saving for retirement with mutual funds is the tax implications of doing so. In particular, the focus is on equity- or stock-oriented mutual funds. Some stocks pay dividends, and if those dividends are first taxed at the corporate level (meaning that the company pays federal income taxes), then the dividends paid to you are considered “qualified” dividends. When you purchase an asset and sell it for a price greater than the price you paid for it, the difference (profit) is known as a capital gain. When you’ve owned that asset for more than twelve (12) months, that capital gain is considered a long-term capital gain. Conversely, owning an asset for less than twelve (12) months and selling it for a profit is considered a short-term capital gain.

It’s important to know that the tax rates for income earned from qualified dividends and long-term capital gains is less than ordinary income tax rates. Sources of ordinary income include income such as 401(k) withdrawals, IRA withdrawals, pension and/or annuity payments, and rental income. Ordinary income tax rates can be as high as 39.6%, but qualified dividend and long-term capital gains tax rates are substantially lower.

For 2016:

If you are single and your income is less than $37,650

If you are married, file a joint tax return, and your income is less than $75,000

If you are head of household and your income is less than $50,400

If you are married, file separate tax returns, and your income is less than $37,650, then

The maximum tax rate on qualified dividends and capital gains is zero percent (0%).

For persons that earn more than the amounts listed above, the maximum tax rate on qualified dividends and long-term capital gains is only fifteen percent (15%), and for high-income earners, those in the 39.6% tax bracket, the maximum tax rate for qualified dividends and long-term capitals gains is 20%.

To learn more about whether you can benefit by saving for retirement with mutual funds, please contact Jones Wealth Management Group at 901-312-9166 and schedule a no-cost, phone or in-person consultation. Jones Wealth Management Group does not provide tax advice. Please consult your tax professional as it pertains to your situation. As always the final decision is always the client’s. This information should not be used as a basis for tax advice. In any specific case, the parties involved should seek the guidance and advice of their own tax counsel.

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