What’s tax efficiency?
QWhat’s a mutual fund’s tax efficiency, and do I need to pay attention to it?
— K.R., Dayton, Ohio
AA mutual fund’s tax efficiency is related to its turnover ratio, which reflects the fund’s buying and selling activity. If a fund has a low turnover ratio, that means that its managers are keeping the securities in the fund longer after buying them. If they’re not selling various holdings frequently, then there will be fewer or smaller taxable distributions of gains to shareholders. That’s generally a good thing. Funds focused on generating income will often be less tax efficient because the dividends and interest they collect and send to shareholders are typically taxable income.
You don’t have to worry too much about tax efficiency for funds in tax-deferred accounts such as traditional IRAS or 401(k)s. Dividends, interest and capital gains accumulate in them on a tax-deferred basis until you withdraw your money. Such accounts are good places for your least tax efficient investments, such as stocks you plan to hold for less than a year and mutual funds with significant short-term capital gains, dividends and/or taxable bond interest.
QWhat’s a tax inversion?
— D.F., Fayetteville, North Carolina
AIt’s a move a company makes to reduce its taxes. It involves becoming a subsidiary of another company in another country — one with more favorable tax rules.
Many American companies have done this. For example, in 2015, the huge medical device company Medtronic bought the Irish health care concern Covidien for around $50 billion, and now has its headquarters in Ireland, which has lower corporate tax rates.
Tax inversions have been criticized for robbing the U.S. of tax revenue, and there have been calls to rein them in.
bubbles. A particularly famous one occurred in the Netherlands in the 1600s, where tulip bulbs soared to ridiculous prices, with single bulbs worth more than the price of a home, and one bulb exchanged for an entire brewery. Of course, demand — and prices — eventually imploded.
Yes, some collectibles can make and have made some people wealthy, but it’s a risky game. If you see people snapping up certain items in a frenzy, expecting future riches, be skeptical and tread carefully.