Advisers seeking to squeeze out every drop of tax savings for their clients pay attention to details — even when it results in extra work. That extra work can be daunting, sometimes so daunting it can be tempting to pass on some opportunities. Such is often the case for capital gain distribution avoidance, otherwise known as CGDA.
What is CGDA? When a mutual fund is estimated to be throwing off a high capital gain distribution at the end of the year, investors can be hit with an unexpected and significant tax cost. If you as the adviser do nothing, your clients might be upset come April 15. By selling the fund before these noncash dividends are posted, investors avoid the taxable income. "Advanced" CGDA involves several steps:
1. Identify funds estimating high capital gain distributions.
2. Choose a replacement fund or exchange-traded fund with low or no expected capital gain distributions.
3. Identify clients whose holdings justify a sale and replacement — when the dividend decrease net of realized gain or loss on the sale results in significant tax savings.
4. Place the trades.
Steps 1 and 2 typically require a lot of research, since capital gain distribution estimates are reported separately by each mutual fund company. Step 3 can be challenging without software. Step 4 is usually the easiest.
A solution is now available for Steps 1 and 2. A new, free and easy website that collects capital gain distribution estimates for all major fund companies is now available. At
CapGainsValet.com, Mark Wilson, chief investment officer at The Tarbox Group Inc., provides a simple searchable database that is regularly updated as new fund company estimates are released.
“I first came up with the idea of CapGainsValet 16 years ago,” Mr. Wilson said. “Our firm has been collecting, consolidating and reviewing capital gains estimates for over 20 years. This information helped us make smart trading decisions that saved our clients tens of thousands of dollars in taxes. I felt it was a shame that our work was only valuable to our team and that other smart folks/firms were probably going through the same process. Since a major mutual fund information provider has yet to make this information easily available, I finally decided to make this happen."
Although there is no fee for using the site, Mr. Wilson suggests donations to the JDRF, which was formerly known as the Juvenile Diabetes Research Foundation.
Sheryl Rowling is chief executive of Total Rebalance Expert and principal at Rowling & Associates. She considers herself a nontechie user of technology.
