If I request the dividends to be reinvested do I still pay taxes on those reinvested dividends or is it deferred until we take the money out? Just thinking ahead for our taxes next year. We expect to invest for the long term, hopefully 20 properous years or so. Not sure what a 'Tax-Managed Fund will do for me, I am unfamiliar with how they work.Outside a tax-sheltered account, "distributions" from a mutual fund are taxable. Even if reinvested.There are, beginning 2004, 4 categories of distributions from stock funds. Some funds do distributions once a year, others do them quarterly or even monthly, and some funds have different schedules for different categories.The categories are:Qualifying dividends (new category in 2004), taxable at LT cap gains ratesNon-qualifying dividends (formerly all dividends) - I think stock funds with signifigant bond components put interest here as well. This is taxable as ordinary incomeLT cap gainsShort-term cap gains, taxable as ordinary incomeSince capital LOSSES are never distributed, quite a lot of funds currently have a signifigant stockpile of capital losses. There won't be any capital gains distributions from a fund until its capital losses are covered by new gains.Tax-managed mutual funds tend to make longer-term investments, preferring a long-term cap gain to a short-term cap gain (except possibly when there are losses still to cover) and preferring qualifying to non-qualifying dividends. And willing to risk some depreciation of its position to express that preference. After all, a 100% gain subject to LT cap gains taxes (up to 15%) is an 85% gain; but a 110% gain subject to ST cap gains taxes (up to 30%) is only an 82.5% gain.All else being equal, which it never is quite, you would expect the tax-managed mutual fund to have a lower PRE-tax return and therefore be less suitable for an IRA account.On the other hand, one of the ways in which things are NOT equal is that the tax-managed fund can be expected to have less stock turnover and therefore lose less to spreads (how the market-makers make money) and commissions (how the brokers make money) as compared to a non-tax-managed fund.Since most stock indexes are pretty stable in their content (I can't think of an exception, but there may be some), an index fund is almost automatically a tax-managed fund as well. Index funds also tend to have lower expense ratios (how the fund managers make money) which is a good thing for the investor.
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