Bad Timing: Get Ready for Higher Taxes on Your Investments

What's an investor to do?

On the front end, you can avoid this problem by investing through a tax-advantaged account like an IRA or by investing in a comparable exchange-traded fund rather than a mutual fund.

Because of the way ETFs are bought and sold like individual stocks, in most cases, they do not pass along capital gains to individual investors.

If you do own mutual funds in a taxable account, check to find out if and when your funds might be paying a capital gains distribution. This information is posted on many fund company Web sites. Or you can call the fund family directly.

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There are three key dates to look for:

Record date: All shareholders of record as of this date will receive the distribution.

Ex-dividend date: The date on which the distribution amount per share is deducted from the fund's net asset value, or share price. If you reinvest your dividends, then you will be receiving new shares equivalent to that amount.

For instance, if you own a fund that trades at $10 a share and that will distribute a $2 a share gain, then the share price on the ex-dividend date will drop to $8. But you will receive an additional $2 worth of shares. That means the total value of your investment is not affected by the capital gains payout.

Payable date: This is the date the fund actually pays out the distribution.

Calculate what the gain might mean for you in your tax bracket. Despite this year's declines, some fund holders still might be ahead on their original investment and may want to continue to hold the fund and avoid paying additional capital gains taxes if they sold the fund.

Others who bought into a fund recently and have experienced only losses, might want to consider selling their shares before the distribution is made to avoid the tax hit.

In either case, don't let taxes be the sole criteria for your investing decisions. Most important are long-term considerations.

Finally, if you're thinking about buying a particular fund in a taxable account, you might want to wait. Check to see if there will be a capital gains distribution coming soon from this particular fund. If there's one coming up soon, you might want to wait until after the distribution is made.