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I only dabble in mutual funds holding most of my portfolio in common stocks. I have 3 T.Rowe Price Funds, and today there were some reinvestments showing on the account that I don't understand.

There was a dividend reinvestment (I get this), but there were also 2 reinvestments into the stock listed as Long Term Capital Gains Reinvestment and Short Term Capital Gains reinvestment. I don't really know what those are.

The website also lists my average price per share but today, after these reinvestments, it shows the average price per share I have paid with the total dollar amount but next to it there is the total number of shares which represents the additional shares purchased with these reinvestments.

Can someone explain what these transactions were?

The only think I can think of is that the funds sold holdings for a gain and then distribute those gains to the funds shareholders proportionally based on the number of shares you hold. Then they automatically reinvest those funds into you account as additional shares. Am I on the right track?

Thank for any help you can provide in understaning this.

Regards,

Wm
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Wm,

The only think I can think of is that the funds sold holdings for a gain and then distribute those gains to the funds shareholders proportionally based on the number of shares you hold. Then they automatically reinvest those funds into you account as additional shares. Am I on the right track?

You got it. I think the key here is to call this transaction a distribution, rather than use the blanket term, dividend. Because dividend is a specific type of distribution. Semantics...

Part of the distribution is ordinary income, short-term C.G., and long-term C.G. While these may have different tax ramifications to you, if you are reinvesting your distributions, then they will all be reinvested. It's all really one transaction.

Hope that helps.
Ryan
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Thanks Ryan- I wanted to make sure I understood what was going on in my account.
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Greetings,

The only think I can think of is that the funds sold holdings for a gain and then distribute those gains to the funds shareholders proportionally based on the number of shares you hold. Then they automatically reinvest those funds into you account as additional shares. Am I on the right track?

Yes, IF you select to have your distributions re-invested. Some folks take them in cash and use them for other purposes, e.g. to rebalance or for income, etc. is something to be aware of as down the road you may want to use this option.

A key point here is that a mutual fund itself does NOT pay taxes, but passes this onto shareholders. Now, if you hold the fund in an IRA-like account then there aren't any taxes to be paid on this.

Regards,
JB
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It's all really one transaction.

I beg to differ. I'll bend just a little bit if we're talking about shares held in a tax-free or tax-deferred account but not at all in a taxable account, to wit:
In the course of the year the mutual fund (an investment company you own shares of) buys and sells shares, collects dividends on shares held and makes other transactions in accordance with their prospectus. The tax structure WRT mutual funds is that the funds themselves are not taxed but gains are accountable to the shareholders who will pay tax at their personal rates on the funds' dividends, short term capital gains and long term capital gains just as if the shareholder had directly held the stock (et al.) shares. If you hold the fund in a taxable account there will be separate entries and different tax rates in your 1040 schedules for Div, STCG and LTCG. Definitely not one transaction either at the fund or on the 1040.

Reinvestment of these gains is an option some people choose and others don't. What happens, usually in December, is this: first, on the distribution date the amounts of the respective gains are distributed to shareholders on the books of the fund so NAV (of investments) per share drops by that amount but the fund's total dollar amount is still there. Next, for those shareholders who take the distributions in cash, checks are written and for those who reinvest, additional shares are purchased at the new NAV. Simplistically, if you hold 100 shares worth $10 (a $1000 holding) on the distribution date and there's a 5% distribution split among Div, STCG and LTCG you now hold 100 shares worth $9.50 and $50 cash. Your $50 distribution money, reinvested, buys about 5.26 shares so you now hold about 105.26 shares at $9.50; still the same $1000 total. The dollar value of your holding has not changed at all, you simply hold more shares at a lower NAV. Of course, you owe the IRS tax on the $50 distribution.

HTH
KennyO
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