SEC rules explain mutual fund taxes

Associated Press

The new rules are available on the SEC’s Web site: www.sec.gov/rules/finrindx.htm

WASHINGTON — Mutual fund investors will get more information about the tax bite on their portfolios and their after-tax returns under rules adopted yesterday by the Securities and Exchange Commission.

Taxes are one of the most significant costs of investing in mutual funds. An estimated 2 1/2 percent of an average fund’s return is now lost to taxes, though many people aren’t aware of the impact.

The rules, first proposed by the SEC last March, are designed to help investors understand the magnitude of tax costs and compare the impact of taxes on the performance of different mutual funds.

The tax impact on investors varies widely among the 7,000 or so mutual funds in this country, because differences in fund investment strategies can produce markedly different tax consequences.

Of the estimated $6 trillion that Americans have invested in mutual funds, roughly $3 trillion is in taxable accounts.

Last April, the House of Representatives passed legislation directing the SEC to develop final rules on mutual fund tax disclosure within 18 months.

The rules require mutual funds to disclose in prospectuses and annual reports the estimated one-, five- and 10-year returns after taxes so that investors can compare different funds. The returns have to be shown in two ways: estimated taxes for investors who sell their fund shares and for those who stay in the fund.

Mutual fund companies currently are required to disclose only returns before taxes.

The mutual fund industry has said it supported, in principle, the SEC rules. Industry spokesmen say that some fund companies — though far from a majority — already disclose tax impacts in some form.

The SEC rules assume that taxes are levied on investors at the maximum individual federal income tax rate of 39.6 percent, providing a "worst case" scenario.

The median income of mutual fund investors is $55,000 a year, however, a level far below the maximum tax rate.

Exempted from the tax disclosure requirement: money-market funds and tax-deferred investments such as 401(k) plans and variable annuities.

Earlier this week, the SEC adopted a rule aimed at preventing investors from being misled by deceptive names of mutual funds.

The new rule requires, for example, that funds with the words "health care" in their names invest at least 80 percent of their assets in health-care company stocks.

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