Learn Investment Basics: Total Return Including Dividends

There are three ways a mutual fund investor can earn money:

• Realized Capital Gain – Selling shares for more than you paid for them.
• Dividends – Payments from an investment to you as the investor. With mutual funds, interest and dividend payments are collected from the underlying investments and paid out on a regular basis (usually monthly or quarterly).
• Internal Capital Gain – When the fund manager sells a stock in the fund for more than he paid for it, the fund realizes a gain. This is passed onto the investor.

Each of these is a taxable event to the investor holding shares outside of a retirement plan. Please refer to the section below for details.

Taxation of Mutual Funds

Mutual funds may be purchased in a retirement plan or an IRA. In this case, the taxation rules for retirement accounts apply (i.e., if the account is tax-deferred, it remains that way until dollars are withdrawn at retirement). These are the rules that would apply to investments held in your Plan account.

The following tax rules apply to mutual funds held outside a retirement plan:

• Taxes on dividends – Taxes are due on the dividends that are earned on an annual basis. This includes both dividends that are distributed and those reinvested. In either case, investors receive a 1099 form from the mutual fund company with information that must be included on the investor's tax return.
• Capital appreciation – No taxes are due on an annual basis if you do not sell shares. Upon the sale, capital appreciation becomes a capital gain.
• Realized Capital Gain – If you sell your shares at a higher price than you paid, you experience a capital gain and a taxable event. Taxes due vary depending on the length of time the investment was held. Consult your tax advisor for specific advice on capital gain taxes.
• Internal Capital Gain – The mutual fund does not pass individual capital gains on to the investor as they occur. Instead, the fund manager keeps track of all gains and losses for the year and adds them together for a total "net gain" or "net loss". If the fund experienced a "net gain", you receive a 1099 form from the mutual fund company with information you must include on your tax return.

Mutual fund tax consequences can be complicated. Contact an attorney or tax advisor for more specific information on this subject.

Next steps

Talk to the HELPLINE to get help and start planning for retirement.

Neither the Plan nor its representatives give legal or tax advice. Contact an attorney or your tax advisor for specific information on capital gains and mutual funds tax consequences.