End-of-year strategizing
We are smack dab in the middle of the end-of-year planning cycle in my practice. With two months left in 2026, we still have enough time to engineer and execute portfolio allocation and tax planning.
We proceed into this planning period with two market realities driving much of our strategies and advice. The first is stocks have once again returned higher than average gains in 2026, now for the fourth year in a row. The second is interest rose dramatically in 2026, with the yield on the benchmark U.S. Treasury bond moving higher by over 1%, which is roughly a 25% increase in yields.
Remembering when interest rates rise, bond prices move lower, this means many bonds mutual funds have experienced share price declines in 2026 as their underlying bond portfolios have priced down related to the increase in interest rates. This combination of market factors opens a certain type of tax planning window for this year.
If you are reading this thinking, you may not have any tax planning to do, and you own mutual funds outside of an IRA or retirement plan, then I beg to differ. This is because after multiple years of above average gains in the stock market, many stock-focused mutual funds no longer have portfolio losses embedded among their holdings. This, in turn, means when the fund manager sells positions to satisfy redemption requests from investors in the fund, it is highly likely the manager is selling stocks which have appreciated in value, creating realized capital gains for the fund.
These realized capital gains are typically passed onto the fund’s investors in the form of a distribution that occurs in the fourth quarter of the year. In my experience, most mutual fund investors tend to reinvest these capital gain distributions in a process described here.
Suppose a mutual fund has a share price of $10.00. Inside the portfolio used to determine the fund’s share price, is $1.00 of realized capital gains waiting to be distributed. At some point in the fourth quarter of the year, the fund manager distributes the $1.00 to investors, which cause the share price of the fund to drop by $1.00 to $9.00. Many investors then take this $1.00 and reinvest it into the fund’s shares at $9.00. The result is the investor has more shares, which are valued at a lower price, and the transaction ends up being value neutral on the reporting statement.
The $1.00 distribution, however, is taxable to the investor, even though their perceived value in the fund did not change. At times this somewhat “surprise tax” can be simply irritating, but depending on circumstances sometimes it can be outright infuriating, especially if it contributes to income levels that cause future Medicare surcharges (IRMAA), or causes the investor to phase out of some or all of their three-year senior tax break.
So, here are some tips for this type of planning. First, know your risk. Mutual funds are now publishing their expected 2026 capital gains distributions, and this information is available from the fund family or from websites which report this information, such as CapGainsValet.com or JP Morgan’s Fund Heatmap service available online. Right about now, funds are determining and announcing not only expected amounts of capital gain distribution, but also the record and payable date which are used to determine when shareholders will receive these distributions.
Both pieces of information are extremely important because this data enables an investor to make portfolio level decisions to manage the tax implications associated with these pending distributions, or in some cases, depending on individual investor circumstances, whether the investor should continue to hold the fund into the distribution dates or sell it to avoid the distribution all together.
Once the capital gains amounts and timing are determined, the investor can then survey the rest of their portfolio for capital losses which can be realized and then used to offset the pending capital gain distributions expected from their stock funds. In a year when interest rose as aggressively as they did in 2026, there’s a pretty good chance capital losses can be realized from the bond funds or individual bonds held in the portfolio.
So, the idea is, perform a rebalance with tax planning in mind. After gauging potential capital gain distributions and then embedded losses in the bond component of a portfolio, the losses can be “harvested,” or realized and used to offset pending, but still obscured, potential capital gain distributions in the stock funds. After 30 days the sold bond funds can be repurchased under wash sale rules, but in my experienced there can be a lot of performance consistency between bond funds, and other similar bond funds or bonds can be repurchased earlier than 30 days.
If this all sounds like a lot, it is. If you have an advisor and may be exposed to this type of tax risk, the advisor should be addressing the issue. If you invest for yourself, all the data needed for this type of planning is available online, and it is worth the effort to strategize.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. No investment strategy can guarantee a profit or preserve against loss. Past performance is not a guarantee of future results. This material may contain forward looking statements; there are no guarantees that these outcomes will come to pass.
Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
