800.610.1460

PO Box 2500

Walla Walla, WA 99362

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Managed Account Benefits

One of the few downsides of accumulating wealth is paying income or capital gains taxes on your investment earnings. Investing through a separate account may protect you from some of the unexpected tax consequences of owning mutual funds.

Many mutual fund managers turn over securities in their portfolio regularly, taking profits or cutting losses. Unlike tax-conscious investors, who may wait to sell appreciated assets until the gain qualifies for the lower long-term capital gains tax rate, mutual fund managers often sell assets in less than a year. Any short-term capital gains passed on to you are taxed at your regular tax rate.

Further, mutual fund managers are sometimes forced to sell shares if shareholders want to redeem substantial holdings. Any capital gains that result are passed along to you as well, potentially increasing the tax you owe.

You might also have long-term capital gains on the sale of securities that the fund has owned for a long time if they've increased significantly in value. Of course, if you've been a shareholder for most of the period, you've shared the benefit of the growth on which you owe tax. But if you've purchased shares only recently, you still owe tax on the gains allocated to your shares even though you didn't benefit from the security's increasing value. In fact, the price you paid for your shares reflected that increased value. Those factors produce what are known as embedded or phantom gains, but the taxes they provoke are very real. With separate accounts, there are no phantom gains. That's because your cost basis in a security is its price the day that security was added to your account. When the security is sold, your gain or loss depends on the difference between the selling price and your cost basis. And if some other investor sells shares in an account run by your investment manager, the transaction has no effect on your account.

Another advantage of separate accounts is that you can ask your investment manager to sell securities that have dropped in value if you can use the capital losses to offset capital gains you've realized during the year. Or you can request that any selling be postponed into the next tax year to limit potential capital gains on investments that have increased in value.