Perspectives

Ask T. Rowe Price – I’m trying to decide which mutual fund cost basis method to use. What do I need to know?

 Stuart Ritter, CFP®, a senior financial planner with T. Rowe Price, explains the different  methods and their respective advantages.

Knowing the nuances and potential tax benefits among the different choices may help you make your selection.

The new mutual fund cost basis reporting regulations that went into effect on January 1 this year require T. Rowe Price and other financial institutions to report cost basis to the IRS on Form 1099-B for your sale of mutual fund shares purchased in 2012 or after (“covered shares”).  Our default method for taxable mutual funds is average cost—the total amount of money you’ve invested divided by the total number of shares you’ve purchased. Alternative ways of figuring cost basis are called “specific identification” because each one involves choosing which shares to sell. If you want to continue to use average cost, you do not need to do anything—your cost basis information for covered shares will be sent by T. Rowe Price to the IRS. If you select a different method, it generally will apply to sales from that point forward. The table will help you understand your options and determine which method best meets your needs.

The IRS requires that changes into and out of average cost be made in writing—either online or through U.S. mail or fax.
 

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