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Author: scottv67 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76419  
Subject: Taxes on mutual funds, IRAs Date: 10/25/1997 1:57 PM
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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
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Author: kmannion Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 535 of 76419
Subject: Re: Taxes on mutual funds, IRAs Date: 10/25/1997 5:41 PM
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hi! sorry for previous blank message.

I suggest that you do a lot of reading and get caught up on tax law prior to filing your 1997 returns. While we can all be of assistance - you will want to do your own research.

In mutual funds (non-IRA) you are at the mercy of the fund manager as to turnover of the portfolio. You will be required to declare and pay taxes on dividends and CG. In an IRA you do not pay taxes until you withdraw the $ - and then pay taxes at your current tax bracket (except for the Roth IRA).

If you have individual stocks you can control CGs - by determining when, how many, and which shares you sell, but dividends are still taxable when you receive them (even if they are reinvested and you actually never receive the $).

I am sure you don't want to tangle with the IRS - so start doing your homework now. We will all help.

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Author: TMFPixy Big gold star, 5000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 539 of 76419
Subject: Re: Taxes on mutual funds, IRAs Date: 10/26/1997 2:27 PM
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Greetings, Scott, and welcome to Fooldom.

<<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 >>

You will pay taxes on both capital gains and dividend income earned by the fund and reinvested by you during the year. The amount of both will be reported to you and to the IRS on a Form 1099 issued by the fund after 12/31/97. You should get that form by 2/15/98 to enable you to declare it on your taxes.

You'll pay taxes on capital gains earned by the FUND during 1997. The fund sold individual securities during the year, thus generating reportable gains (or losses). By law, even though you sold none of the fund shares YOU hold, the fund's sale of securities IT held gave rise to this reporting requirement. By law, the fund must pass on these profits (or losses) to you, and you must report same on your tax return.

If you sell all of the shares in the fund at once, you will have a reportable gain (or loss) based on your original purchase price(s), the selling price, and the holding period. Short term and long term gains (or losses) are based on the length of time between your purchase and the date of sale.

You and you alone - not the fund - are responsible for knowing these things, so it's absolutely mandatory you learn something about them. I'll second Kmannion and 4play in suggesting you peruse some of the posts in the Tax Strategies folder, read some of the FAQs on these issues written by TMF Taxes, and also contact your fund. This time of the year the better fund families usually provide shareholders a tax guide that should prove beneficial reading to you on this topic.

Regards….Pixy



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