Q: If one is in the 27 percent or higher tax bracket, are there mutual funds that primarily declare profits as capital gains and not as regular income? Capital gains would only be taxed at the 20 percent rate. Do such mutual funds exist? How does this approach compare with investing in municipal tax-free bonds? - C.J., Memphis
A: The types of mutual funds you describe are growth-oriented and do not hold stocks of companies that pay high dividends (which are taxed at normal income, not capital-gains rates), said Phyllis Scruggs, a certified financial planner with Waddell & Associates, an investment management firm.
There also are funds that have been set up for tax efficiency - they pay little in the way of either dividend income or capital gains to shareholders, she said. Companies such as Morningstar Inc., a mutual funds and investment research firm, have information that will help you identify such funds.
Also, the Securities and Exchange Commission now requires funds to show both before-tax and after-tax returns so you can compare funds on that criterion, she said.
Exchange traded funds (EFTs) are another option. They are similar to mutual funds in that they hold a basket of stocks, but they don't pay distributions like traditional funds. You make money predominantly on an increase in the value of the shares and you pay tax on those profits, if you have them, only when you sell the investment, she said.
Reach David Flaum at The (Memphis, Tenn.) Commercial Appeal at firstname.lastname@example.org.