Boy, am I confused now. I think I was gone the day they covered taxes and mutual funds in school (just kidding).

John's reply has me confused:

"Scott, any money in an IRA will remain tax free, (Including dividends and all capital gains) until the day that you withdraw the funds. On that day you will pay taxes at your ordinary income tax rate on all profits. If you put your money into a non IRA account you must pay your taxes on all income, (dividends, capital gains, etc.) in the year in which they occur."

Let's start at the beginning...

1. I've got a mutual fund where the quarterly dividends are automatically re-invested. If I don't see that money in 1997, do I still have to pay taxes on it?

2. If I don't sell any shares in 1997, would I still have to pay a capital gains tax? I thought you only paid that tax when you sold shares for a profit.

3. If I sell all the shares in the fund at one time, how does that affect my tax return? It makes sense that I would have to pay taxes on the "profit" that I made due to the increased share price but are there any other things I should be aware of? When do I pay the taxes on the dividends? In the year that I receive the dividends (in the form of additional shares) or when I sell those additional shares?

So the tax benefit between an IRA and a non-IRA fund is that with the IRA, you don't have to pay taxes each year on the dividends that were paid that year, right? You pay taxes on the dividends in an IRA only after you starting making withdrawals.

Ugh. This tax stuff is complex. ;^(

-Scott the Tax Newbie