The GROWTH Act: Fixing an Unfair Tax Burden on Long-Term Investors 

Mutual funds are still one of the easiest and most practical ways for people to build long-term financial security. Families saving outside of workplace retirement plans, retirees managing taxable assets and everyday investors who want diversification all rely on them. 

That is why we support the GROWTH Act and are asking Congress to pass it. 

The bill would help long-term mutual fund investors avoid surprise tax bills on automatically reinvested capital gains until they actually sell their shares. Importantly, investors would still pay the taxes they owe. The only difference is that they would pay when they sell their shares, not while they are still invested and reinvesting gains. 

This is a straightforward change that addresses a basic question of fairness. 

In many cases, these investors are doing exactly what you, our members, and other wealth management experts advise savers to do: They are putting money away regularly, staying invested and using accessible investment products to prepare for the future. But under current tax rules, these investors can still receive tax bills even if they have not sold any shares. 

Of course, our financial advisor members likely know why this happens. When a mutual fund manager sells investments inside the fund, the sale can generate capital gains that the fund distributes to shareholders. Even when an investor automatically reinvests that distribution, the IRS generally treats it as taxable, leaving the investor with a surprise tax bill despite not having sold any shares.

To be sure, your clients generally understand that selling an appreciated security creates a tax bill. With advisors’ guidance, they make the decision to sell, realize the gain and take the proceeds; yet they can face a tax bill even when they stay invested, reinvest the distribution and never take money out of the account. 

Granted, in any one year, the drag may seem small. It may amount to 15 basis points here or a few additional dollars there, resulting in a tax bill that does not appear dramatic in isolation. But some clients will undoubtedly feel that impact over time. Long-term investing is built on compounding, and money used to pay taxes is money that is no longer invested and working for the investor. 

In a fund that grows in value over many years, the difference could be tens of thousands of dollars, potentially more for investors with larger taxable accounts. For Main Street American families saving for retirement, education, a first home or greater financial security, that is significant. 

The GROWTH Act would address that mismatch by recognizing the difference between an investor who chooses to realize a gain and an investor who is simply staying invested, reinvesting distributions and trying to build financial security over time. 

Across the financial services industry, professionals can see how these rules affect individuals and families working to build long-term financial security. Clients are saving responsibly, managing taxable accounts and trying to make good long-term choices, only to be surprised by taxes on gains they did not personally choose to realize. 

The bottom line: Public policy should make it easier for Americans to invest, build wealth and retire with confidence. Passing the GROWTH Act would be a meaningful step toward that aim and a fairer system for long-term mutual fund investors.