Proposed GROWTH Act may add up to $1,340 in returns, reshaping taxable-account planning.
A bipartisan proposal circulating on Capitol Hill could meaningfully change how advisors think about the tax efficiency of mutual funds held in taxable accounts, according to the Investment Company Institute.
The Generating Retirement Ownership Through Long-Term Holding Act, known as the GROWTH Act, would allow investors to defer capital gains taxes on reinvested mutual fund distributions until shares are ultimately sold. Supporters argue the shift would put mutual funds on more equal tax footing with individual stocks and other capital assets.
Today, mutual fund investors are required to pay taxes annually on capital gains distributions, even when those gains are reinvested and no cash is received. The proposed legislation would eliminate that annual tax bill, allowing gains to compound tax-deferred during the holding period.
ICI says that in a hypothetical example, a $10,000 investment in an actively managed US equity mutual fund held from 2015 through 2024 could have generated as much as $1,340 more in after-tax returns if the GROWTH Act had been in effect.
“The GROWTH Act would allow Main Street investors to keep more of their own money, incentivize them to keep investing, and make the tax system fairer to around 40 million middle-class Americans,” said ICI President and CEO Eric Pan. “These families rely on investments in mutual funds to save for a house, pay for their children’s education, and ensure they have enough money in their senior years.”
Pan also urged lawmakers to move the bill forward, saying, “We strongly urge both chambers of Congress to pass the GROWTH Act and improve long-term financial security for millions of Americans.” ICI has sent a letter to Congress members urging their support.
The proposal could have broad implications for advisors, particularly those working with mass affluent clients who hold mutual funds in taxable accounts. The ICI estimates roughly 40 million US households own about $7 trillion in long-term mutual fund assets outside of tax-advantaged accounts, with a median household income of approximately $140,000.
If enacted, the change could reduce the tax drag that often makes mutual funds less attractive than ETFs for taxable investors. Advisors may need to revisit asset location decisions, after-tax return assumptions, and the role actively managed mutual funds play in client portfolios.
While the bill faces an uncertain path through Congress, its potential impact underscores how tax policy changes can ripple through portfolio construction and long-term planning conversations.