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LAS VEGAS — As 2025 winds down, many investors are bracing for year-end mutual fund distributions, which can trigger a hefty tax bill for assets held in a taxable brokerage account. But there are strategies to avoid the payout, experts say.
For 2025, “you’ve got some pretty eye-watering numbers,” with some funds planning to distribute double-digit capital gains, said Brandon Clark, director of exchange-traded funds for asset management firm Federated Hermes.
After another strong year for the stock market, more than 10 mutual funds are estimating payouts of at least 25%, with most distributions expected to come around late November through year-end, according to a Morningstar report published on Monday.
If you own these mutual funds in a brokerage account, you could pay taxes on the capital gains payouts, even when you reinvest the proceeds. Those reinvested gains lower your “basis,” or the asset’s original purchase price, which can help reduce future profits.
Still, “the ETF solves a lot of those [yearly tax] problems,” said Clark, speaking at the Financial Planning Association’s annual conference on Tuesday.
ETFs are generally more tax-friendly than mutual funds because of a “tax loophole” that exists for ETFs, Clark said.
Fund managers can make “in-kind” trades and redemptions, which are generally tax-free. As a result, most ETFs don’t have year-end capital gains distributions.
However, if you’re planning to swap your mutual funds for ETFs, there are some key things to know, experts say.
‘Do a quick comparison’ of possible gains
One of the challenges of trading mutual funds for ETFs is that many investors are sitting on significant gains, experts say.
You should “do a quick comparison” of the possible gain from selling profitable mutual funds vs. the year-end payout, said certified financial planner Karen Van Voorhis, director of financial planning at Daniel J. Galli & Associates in Norwell, Massachusetts.
If you sold, you would only incur the gains from mutual funds once vs. yearly payouts, she said. The upfront gain could be worthwhile to “permanently flip to ETFs.”
Know the mutual fund’s ‘record date’
If you’re planning to sell mutual funds to avoid a year-end payout for 2025, “timing matters,” according to CFP Tom Geoghegan, founder of Beacon Hill Private Wealth in Summit, New Jersey.
“For mutual funds, you must sell before the record date to avoid receiving the distribution,” he said. If you own the fund on the “record date” or “date of record,” you will still receive the payout, even if you sell after.
When trading mutual funds for ETFs, you should make sure the new asset “aligns with your investment strategy” without adding unintended risk.