The Capital Gains Issue: Controlling the Timing

How much control do you have--or do you want to have--over your investments? That’s the biggest question to consider in mulling how to best take advantage of new tax rules.

Congress has given investors a lower capital-gains tax rate--a maximum of 20%, down from 28% under the old law--but also has extended the holding period required to qualify for the new, lower rate to 18 months from 12 months. Gains on investments held between 12 and 18 months will still face a top tax of 28%.

With an individual stock, you’ll simply have to weigh the tax benefit of holding on for at least 18 months against the risk that any gain you have might evaporate in that time. But ultimately, when you own individual stocks, you control when you will realize a gain for tax purposes--next week, or 30 years from now.

But if you own a stock mutual fund outside a tax-deferred account, it may be difficult to predict whether you’ll reap the benefits of the lower capital-gains tax rate. The fund will have to tell you each year what portion of your gains are subject to which gains tax rate. And if your fund manager is an active trader, you may realize precious few of those lower-tax-rate gains.

One answer: Buy funds that practice “tax-efficient” investing. Some firms, such as Vanguard Group (phone: [800] 662-7447) and Eaton Vance ([800] 225-6265) offer funds that are specifically “tax-managed” to minimize gains. But beware: While index funds, which mimic stock indexes, are often considered tax-efficient, that may only be true until they’re someday hit with big redemptions.