Taxes and Mutual Fund Inflows around Distribution Dates

28 Pages Posted: 7 Feb 2007 Last revised: 16 Mar 2008

See all articles by Woodrow T. Johnson

Woodrow T. Johnson

U.S. Securities and Exchange Commission

James M. Poterba

National Bureau of Economic Research (NBER); Massachusetts Institute of Technology (MIT) - Department of Economics

Date Written: March 2008

Abstract

Capital gain distributions by mutual funds generate tax liability for taxable shareholders, thereby reducing their after-tax returns. Taxable investors who are considering purchasing fund shares around distribution dates have an incentive to delay their purchase until after the distribution, since this will reduce the present value of their tax liability. Non-taxable shareholders, such as those who invest through IRAs and other tax-deferred accounts, face no such incentive for delaying purchase. This paper compares daily shareholder transactions by taxable and non-taxable investors in the mutual funds of a single no-load fund complex around distribution dates. Gross inflows to taxable accounts are significantly lower in the weeks preceding distribution dates than in the weeks following them, but gross inflows to tax-deferred accounts do not change around these dates. This finding suggests that some taxable shareholders time their purchase of mutual fund shares to avoid the tax acceleration associated with distributions. Taxable shareholders who purchase shares just before distribution dates also have shorter holding periods, on average, than those who buy after a distribution. The cost of the distribution-related tax acceleration for pre-distribution buyers is therefore somewhat less than that for those who buy after the distribution.

Keywords: mutual funds, taxes, capital gains distributions

JEL Classification: H24, G23

Suggested Citation

Johnson, Woodrow T. and Poterba, James M., Taxes and Mutual Fund Inflows around Distribution Dates (March 2008). Available at SSRN: https://ssrn.com/abstract=961389 or http://dx.doi.org/10.2139/ssrn.961389

Woodrow T. Johnson (Contact Author)

U.S. Securities and Exchange Commission ( email )

100 F Street, NE
Washington, DC 20549-9360
United States
202-551-6611 (Phone)

HOME PAGE: http://www.sec.gov/about/economic.shtml

James M. Poterba

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-350
Cambridge, MA 02142
United States
617-253-6673 (Phone)
617-253-1330 (Fax)

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