Tis the season for giving, and this is also a good time to give to yourself by putting away some year-end savings.

But if you invest in a Mutual Fund that is about to pay a distribution before the end of the year, you could get caught in a tax trap…a trap that many innocent investors fall victim to.

Be sure to research the fund you are about to invest in and find out if it’s planning to have a year end distribution. Here is how a distribution from a Mutual Fund typically works. If the price of the fund is $10 per share and the fund does a $1 taxable distribution just before the year is over, the share holder gets the $1 either in cash or the equivalent amount in additional shares. But the value of the fund drops by that same $1, which would bring it down from $10 to $9 in this example. The net value is the same to the shareholder, but the $1 distribution is now taxable.

So let’s say someone invests $10,000 in a fund that is about to pay a year-end distribution. They get a statement showing a $1,500 distribution, and typically the money is re-invested right back into additional shares. The value per share declines to account for the distribution, but the additional shares received still keep the value of the account at $10,000…but now the shareholder has a $1,500 taxable gain, which could mean a $500 tax bill for some. Talk about a Bad Santa.

To avoid this unpleasant surprise, visit the websites of the Mutual Funds that you may be considering and determine if the fund will be paying distributions in December. If you do determine that the distribution will occur in December, and you need to avoid a big taxable gain, wait until the fund’s “ex-dividend” date (after the money has been deducted from its share price), and then make the investment into the mutual fund. Or, consider investing the money in the same Mutual Fund, but buy the Mutual Fund as an IRA, or see if you can invest additional funds into your 401K – and then the distributions will be tax deferred.

It’s so important to add to your savings…but take just a few minutes to understand and determine the dividend date on Mutual Funds, so you can ring in the New Year without having to give Uncle Sam an unnecessary present.