I would also say that it's almost definitely worse to pay taxes now, rather than defer them until later.  There are some possible reasons this could be different, like maybe capital gains taxes will be higher in the future (for some right now it's zero).  You could be in a much higher tax bracket when you have to sell and then could potentially come out worse off, depending on the capital gains tax rate at that time.  Other than that, and maybe a few other very specialized circumstances, you're pretty much universally better off delaying the tax until later.  This is definitely an advantage in favor of index funds, and also to a lesser extent in favor of actively managed funds with lower turnover strategies. 

That said, I believe a lot of times people look at fund distributions in an overly simplistic way.  For example, while index funds are more tax efficient, you also have to consider the tax consequences of having to rebalance.  An actively managed fund that pays a 10% distribution, may not be much, if at all, less tax efficient than an index fund that pays a 1% distribution, if you have to sell another 9% of that fund anyway in order to rebalance. 

That isn't to say that index funds aren't generally more tax efficient overall, but you need to look at the whole picture to develop a truly accurate comparison.  If you are beyond the point where you can easily rebalance your taxable portfolio using only new money, then you do also have to consider the tax consequences of selling to rebalance. 

I come down on Ric's side b/c what he is saying is that most investors reinvest the entire capital gains and enjoy the full advantages of compounding rather than the actuarially correct scenario that is usually analyzed.  Furthermore b/c of this they usually can sell at a loss according to the IRS.  They also are not handicapped by not wanting to get rid of something b/c of embedded capital gains and the subsequent tax liability.

In the real world, they reinvest the entire $20 in oildog's example, not the $17.

Roberta 

I didn't go and read Ric's full post, but I have trouble with Roberta's assertion that people will reinvest all the distribution.  I agree that many will reinvest all of the distribution.  However, one still has to pay the taxes with money from somewhere.  This money that will not be invested.

The benefit of paying MF capital gain distributions...   simple, one hopes that the manger sold assets as the appropriate time and hopefully bought better  assets in their place.  This is what one would hope that an individual stock investor would do also.

 So is it bad to pay tax on MF capital gains distributions.  Not from the standpoint that the manager is selling what he should.  A individual stock owner should not continue holding a stock that has had a great run when it is likely to fall.  Pay the tax and move on.   The idea of a MF being worse and comparing it to someone who holds a stock forever is misleading.  Some stocks will have long runs, others short.  But all will come to a point were they should be sold.

Regards,

jb
 

 I agree J..

But? in my taxable accounts/Ports?

1. I do not Reinvest them on Auto but pay them to MMkt acount

2. I deduct taxes from those Cap Gains & Divs

3. Then I Reinvest the net balance according to my way of how I want to Buy for the upcomming Yr.. ie: All in first mo. of Jan or DCA, etc..

Eg: Fund paid 10%

-15% = +8.5% net

IRA's are a different animal of course

 But? What if you know your Going to Have Alot More Income After Retiring and thus be in a Much Higher Tax Bracket vs while working?

eg" 13% ave Fed tax while working..( Self Employed Business) vs 28% after retiring..

Is the Trad. IRA still good to go with? Or use a Roth?

?

I paid taxes on mutual fund gains this year. The gains disapppeared even before I wrote the check to the IRS.  

Maybe they're just pushing us innocents into buying low so we can sell high?

Roberta