If you own mutual funds outside of your retirement accounts, don’t forget to check on upcoming capital gains distributions. You may still have time to avoid paying taxes on those gains, depending on your funds’ record dates. Whether that is a good strategy for you will depend on your “big picture tax plan.”

Mutual funds buy and sell their holdings throughout the year. If those holdings do well, great. But it’s not so great at tax time if the fund sells holdings for a profit.

How can that be?

“When a mutual fund sells securities that have appreciated in value and the fund doesn’t have any offsetting capital losses, it must distribute those gains, as well as any dividends or income payouts, to shareholders,” quoting Morningstar, a U.S. financial services firm (tinyurl.com/5fwr443z). “Shareholders, in turn, are required to pay taxes on the gains (assuming they don’t have any offsetting capital losses in their own portfolios).”

Bottom line: Capital gains distributions from your mutual funds (not held in retirement accounts) will be subject to taxation to shareholders.

While this may seem unlikely, “you may have to pay taxes on these [capital gains distributions] even if you didn’t sell a single share, and even if you reinvested the income or capital gain right back into the fund and never received a check,” quoting Morningstar.

Do capital gains distributions matter to investors? Sometimes, they can be significant. According to Morningstar’s “Ready for a Big Capital Gains Tax Bill?” (tinyurl.com/38x2rwd3), leading the list of funds with high distributions “is Morgan Stanley Institutional Dynamic Value MAAQX, which is slated to distribute more than 50% in capital gains. Five other strategies are distributing more than 40%.”

The capital gains distribution for MAAQX is scheduled to be paid on Dec. 11, 2024, for shareholders of record as of Dec. 10, 2024, according to Morgan Stanley’s “Estimated 2024 Year-End Distributions,” which you can find online at tinyurl.com/2a47be62.

Note that the total gain is estimated at $6.33 per share, of which $5.65 is short term and $0.68 is long term. These are estimates and can change. The current price per share as of this writing (11/21/2024) for the fund is $12.35.

“The status of any capital gains distributed to shareholders (i.e. whether or not they are considered short-term or long-term) depends on how long the fund owned the securities that produced the gain -- not how long the shareholder owned shares in the fund,” quoting J.P. Morgan Asset Management’s 2024 Dividend and Capital Gain Schedule (tinyurl.com/55hdrx6k).

You can look up each of your funds’ estimated 2024 year-end distributions by searching online for the funds you own. Another example is Vanguard’s, at tinyurl.com/2m9fx9xe.

For example, Vanguard’s Balanced Index Investor fund expects to distribute 2.81% on Dec. 31, 2024, to shareholders of record as of Dec. 17, 2024.

The Vanguard list was created on Oct. 31, 2024, and does not include those funds (such as Vanguard’s S&P 500 Index Fund) that are not expected to distribute capital gains in December.

The estimate will provide a list of funds that expect to pay capital gains distributions “to shareholders of record.”

As for taxes, “Net capital gains are taxed at different rates depending on overall taxable income, although some or all net capital gain may be taxed at 0%,” quoting the IRS (tinyurl.com/yzh8dtfd). For 2024, the taxable income brackets for married filing jointly are (0%) $0 to $94,050; (15%) $94,051 to $583,750; and (20%) $583,751 or more, whereas for single filers they are (0%) $0 to $47,025; (15%) $47,026 to $518,900; and (20%) $518,901 or more (tinyurl.com/5n6ua9df).

Before deciding to sell a fund before the record date to avoid the capital gains distribution, you’ll want to assess your tax situation with your tax adviser. Getting out to avoid the distribution may or may not be advisable. In fact, you may be worse off if the sale generates a big capital gain if you have a profit (for example, you bought the fund for $5 a share and now it’s worth $15).

On Wednesday, Dec. 4, I will be speaking on Integrating Financial & Estate Plans as part of my Retirement Planning presentation series offered through the Greenwich Library. To register, please visit www.juliejason.com/speaker/upcoming-events.

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Offering benefits to both retirement investors and charities, QCDs (qualified charitable distributions), are a favorite topic of mine, especially when speaking with nonprofits or presenting to lawyers in continuing legal education programs. For those who don't know, QCDs are charitable donations made directly from IRAs.

First, let me address charities: Does your population of potential donors include IRA owners? Are any over age 73, the mandated age for starting to take forced withdrawals that are taxable as income (RMDs, or required minimum distributions)? These individuals may wish to avoid taxes on their RMDs while benefiting you, the charity, with a donation -- if only they knew about QCDs.

Now, donors: While donors can make QCDs at age 70 1/2, I'd like to talk with you if you are older (73+) and you have not taken your IRA's RMD yet for 2024. Have you thought of donating some or all of your RMD to charity? The QCD may save you money at tax time while also serving your charitable interests.

Put those two demographics together and you have a winning combination. The retired IRA owner wins. The fundraising charity wins. And the timing could not be better for this particular situation: If IRA owners have not taken RMDs for 2024 as of yet, November is the perfect time to arrange a QCD for 2024.

Potential Donors: According to IRS income tax statistics, there are millions (perhaps as many as 27 million) of QCD candidates based on age and IRA ownership (tinyurl.com/42y8e7rm).

Age: Unlike the age limit for RMDs, which has advanced via legislation since 2019 from 70 1/2 years old to the current age of 73, the age for making a QCD remains age 70 1/2.

Dollar Limit: The maximum upper limit for 2024 is $105,000, increasing to $108,000 for 2025. There is no lower limit.

The Charity Must Be Qualified: Use the IRS Tax Exempt Organization Search Tool at tinyurl.com/497um8xp to see if a charity qualifies.

Payment to the Charity: Payment must follow QCD rules. The governing statute (section 408(8)(B) of the Internal Revenue Code) mandates that the distribution be "made directly" to the charity "by the trustee" of the IRA.

Checks: Now that IRA trustees (custodians) offer check writing on IRA accounts, the question has come up about whether an IRA owner can simply write an IRA check to the charity.

That can work. "Writing a check, drawn from the account but payable directly to the charity, is functionally equivalent to the account owner requesting that the trustee issue a cashier's check payable to the charity," according to an IRS spokesperson.

What would not pass muster? "An IRA distribution, such as an electronic payment made directly to the IRA owner, does not count as a QCD. Likewise, a check made payable to the IRA owner is not a QCD" (tinyurl.com/mvjxezz9), according to the IRS spokesperson.

Checks at year-end: Follow QCD rules. If you don't, your "QCD" could fail. Be sure to engage your tax adviser and the charity of your choice that will receive your donation. Read IRS Publication 590-B at tinyurl.com/ysyp697p.

Time Pressure: It's November -- time for potentially millions of charitably inclined IRA owners, especially those 73 or older who need to do RMDs, to save on taxes while benefiting charities of their choice.

December: Don't wait until the last week of December. "Use of a check near the end of the year might run the risk that the transfer to the charity from the IRA is not completed before year-end," said Mark Luscombe, principal analyst at Wolters Kluwer Tax and Accounting. "The QCD must be withdrawn from the IRA before year-end, so the check has to clear before year-end." Also, be sure to get a written acknowledgement from the charity that it received the contribution.

A note to charities: If you and your team aren't familiar with QCDs, I'm happy to point you in the right direction as part of my pro bono financial literacy efforts. In addition, I have posted some resources on my website (https://juliejason.com/column-resources), including examples of nonprofits that offer donors the opportunity to do QCDs.

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The IRS has announced the contribution limits for 401(k)s and IRAs for 2025, but there's an additional factor this year for those who qualify and want to save more for retirement. The limits are detailed in Notice 2024-80 (tinyurl.com/3rsjw48u).

Defined Contribution Plans: Based on a cost-of-living annual adjustment, the maximum amount someone can contribute in 2025 to a 401(k) or other company retirement plan (403(b), 457 plan and the federal government's Thrift Savings Plan) will be $23,500, an increase of $500 from 2024's limit.

Catch-up: Someone age 50 or older can contribute an additional $7,500 (the same limit as in 2024), bringing the 2025 maximum to $31,000.

Special Age 60-63 Catch-up: New for 2025 is a special catch-up for participants between the ages of 60 and 63 under a provision of the SECURE 2.0 Act of 2022 that takes effect in 2025. (Please note: Not all plans have the catch-up feature.) For those who are eligible, their catch-up contribution will be $11,250 instead of $7,500, making the contribution limit $34,750 instead of $31,000.

Overall Limit: When you add employer contributions, the limit in 2025 is $70,000, up from $69,000 in 2024. This limit captures both employee and employer contributions (but not catch-up contributions).

A reminder of a SECURE 2.0 Act provision that is NOT yet fully in effect is the one requiring that catch-up contributions for higher earners (more than $145,000 in the previous year) be designated as post-tax Roth contributions, not as pre-tax contributions. IRS Notice 2023-62 (tinyurl.com/39jjufm7), released in August of 2023, indicated there would be "an administrative transition period" of two years after Dec. 31, 2023, in relation to the requirement.

IRAs: As for IRAs, the limit on contributions remains the same for 2025: $7,000. The catch-up contribution for those who are 50 and older is also unchanged at $1,000 for 2025, bringing the total to $8,000.

Tax-deductible IRAs: Deductible contributions to traditional IRAs are based on MAGI (modified adjusted gross income). Briefly, to take a tax deduction, the MAGI must be below a certain amount. Different limits apply if the taxpayer or his or her spouse participates in a 401(k). For example, a single person's MAGI is $89,000 if the taxpayer is a 401(k) participant; there is no MAGI limit if the taxpayer (or his or her spouse) does not participate in a company retirement plan.

Roth IRA Contributions: In order to be eligible to contribute to a Roth IRA, MAGI must be below $165,000 (single and head of household) and $246,000 (for married couples filing jointly).

If you are wondering how many people have traditional or Roth IRAs, research released in 2024 by the Investment Company Institute reported that as of year-end 2023, more than 24% of U.S. households had a Roth IRA (31.9 million households). In contrast, 31% had a traditional pre-tax IRA (41.1 million), and overall, 42% of households (55.5 million) had some type of IRA (tinyurl.com/4v3j56zr). The combined IRA assets total $13.6 trillion.

Saver's Credit: The IRS also announced limits for the Saver's Credit (aka the Retirement Savings Contributions Credit), a retirement savings tax credit that is available for lower- and middle-income taxpayers.

The income limit for 2025 is $79,000 for married couples filing jointly, which is an increase from $76,500 in 2024; $59,250 for heads of household, up from $57,375; and $39,500 for single and married individuals filing separately, up from $38,250.

You can find more information on the IRS webpage featuring the Saver's Credit: tinyurl.com/4euvfj8e.

Finally, if you are interested in making a qualified charitable distribution (QCD), the limit in 2025 will be $108,000, up from $105,000 in 2024. Keep in mind that you must be over age 70 1/2 to make a QCD. If you would like to read more about QCDs, email me (readers@juliejason.com).

With the guidelines for 2025 now revealed, you will want to consult with your tax adviser on how these limits relate to your financial plans, as each person's tax situation is unique.

DISTRIBUTED BY ANDREWS MCMEEL SYNDICATION