The taxman is expected to dig deeper into the pockets of mutual fund investors in the coming years, according to new data from Lipper of New York, a development that's sure spur interest in tax-deferred savings vehicles.
About half of the $8.3 trillion money management industry is comprised of taxable funds, while the remainder is held in sheltered accounts like 401(k)s and other retirement products, a Reuters report on the findings observed.
Last year, investors paid an estimated $15.2 billion tab to Uncle Sam, an increase of 58% versus 2004. As MME reported in December, much of that tax came as a result of dwindling carry-forward losses that portfolio managers accumulated in the last bear market. Those losses, which managers can book against taxes for up to eight years, will continue to dry up in the coming years.
Taxes are the greatest drag on fund performance, sometimes two or three times greater than management fees, said Tom Roseen, a senior analyst at Lipper. Over the last 10 years, taxes on mutual funds have reduced performance by an average of 1.6 percentage points on equity funds and 2.4 percentage points on fixed-income products, the study indicated. That's a cumulative loss of 20% and 45%, respectively.