01/19/2015 - The ABCs of Mutual Funds, Part II

Class C funds are like Class B funds except that the back-end load is lower than found in Class B shares (typically around one percent) and is eliminated in a much shorter time, typically a year. However, their management and 12b-1 fees are higher than those of Class A shares. C shares tend to be used by investors who think they may need access to funds within three to four years.

No load mutual funds charge no commission at purchase or at redemption, but are allowed to charge fees within limits. Financial Industry Regulatory Authority (FINRA) rules limit no-load funds to 12b-1 fees of no more than 0.25 percent and total fees of no more than 0.50 percent in order to call themselves no-load funds. By comparison, Class A funds typically charge 1.25 percent per year in fees and Class B and Class C funds typically charge two percent per year in fees.

FINRA also has a "fund analyzer" to let the user compute fund performance net of fees and loads for up to 20 years.

No load funds can be purchased directly without advice, or with advice for an annual fee. This fee is in addition to the fund expenses. So why would managed portfolios hold funds with higher fees and loads? Because the advisors selling the funds get more commission for doing so.

You cannot deduct a commission you pay to a broker to buy investment property, so the loads you pay are not tax-deductible. However, you can use the commission to figure gain or loss from the sale. A front-end load adds to the cost basis of the shares. A back-end load reduces the sale proceeds. 12b-1 fees are not deductible either, but they reduce the return of the investment, and in that way indirectly reduce taxable income.

On the other hand, investment manager and planner fees may be deductible (subject to the 2% floor for miscellaneous itemized deductions) to the extent they relate to taxable income. If the management fee is based on a percentage of assets, it is deductible. Since IRA management fees reduce the value of the IRA, they indirectly reduce the amount of income reportable by the beneficiary. If your IRA custodian permits, you can pay the management fee yourself (instead of having it deducted from the IRA), and then take it as an itemized deduction subject to the 2% floor.

Until next week,
Patti