How Are Mutual Funds Taxed?

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Investing is meant to add to your wealth, with minimal costs from taxation. Knowing the way a mutual fund is taxed can help you reduce any potential taxes on your investment.

Mutual Funds

  • A mutual fund is an investment pool generally containing stocks or bonds. It may also contain other types of securities. Investors in a mutual fund are taxed when they realize a gain (profit) from a sale or receive income the fund generated during the year.

Fund Taxation

  • Unlike stocks, in which investors decide when to sell, thus determining whether they will be taxed, investors in mutual funds cannot control the sale of holdings in a fund. A mutual fund manager or team of managers decides when items in the mutual fund portfolio are sold, and thus taxed.

Taxable Distributions

  • When the mutual fund is profitable for the year, investors receive their share of this profit in the form of a taxable distribution. This gain will be taxed at either your regular rate for income or the capital gains rate, usually 15 percent.

Buying the Distribution

  • If your mutual fund purchase takes place near the end of the year---meaning you haven't owned it very long---you will still owe taxes incurred from transactions that took place during that year, prior to your ownership.

Tax Bracket

  • Your tax bracket will determine the amount of tax you will pay for any gains realized from your mutual fund. Some mutual fund investors seek out "tax-managed funds," since these funds are managed to minimize trading activity that will increase taxation.

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