Many mutual fund companies allow you to
switch funds without a penalty or commission, as long as you stay within their
family of funds. There's a catch though. Unless the funds are in a tax-deferred
retirement account, you could owe income tax each time you make a switch. When
you move money between funds, the IRS considers it a sale. You've sold shares
in the first fund, then reinvested the proceeds in the second. As a result,
you'll owe income tax on any gain.
You should consider switching funds when it
makes economic sense to do so. Just don't forget that Uncle Sam may have his
hand out at tax time.
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