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Overview on Mutual Fund Distributions
Individuals who invest in mutual funds in a regular or taxable
account generally pay taxes each year on any realized capital
gains they incurred and on any ordinary income or dividends
they received. Mutual funds do not pay taxes, and, by law,
they are required to pass any net realized gains and ordinary
income earnings on to their individual shareholders. Individual
shareholders are then required to report these income sources
on their tax returns and pay taxes accordingly. Shareholders
are notified annually of the amount of capital gains and ordinary
income distributed by their mutual fund company. When you
receive your capital gains distribution notice, you should
retain it for use in preparing your tax returns. If your mutual
fund shares are held in an IRA, 401(k) or other tax-advantaged
retirement account, tax issues are usually not a consideration.
Capital gains distributions are made to all investors who
hold shares of a mutual fund as of the “record” date, and
are paid on the “payable” or “ex” date. Capital gains distributions
are paid out in a dollar amount per share. Depending on your
prior arrangements with the mutual fund company, you may receive
your distribution in cash or, more typically, have your distribution
reinvested in the fund. If you chose to reinvest your distribution,
the reinvestment is made at the new per share price that results
after the fund has distributed its gains. This results in
the shareholder owning more shares at the lower price, or
net asset value (NAV), and does not affect the total value
of the account.
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