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If the fund manager sells a stock for more than it cost the fund a profit is generated. This profit is called a capital gain and it is taxable. Capital gains are taxed at your ordinary income tax rate which is between 28% and 38.6% for most investors if the fund held the stock for less than a year. If the stock was held for more than a year, in other words long term, the tax is 20%. There are a couple of reasons why mutual funds pay taxes. If the fund does poorly investors will bail out. The mutual fund has to sell off stock to pay the investors who leave. Even if you are not one of the investors jumping ship you will still have to pay your portion of the capital gains tax. Dividends are another reason that taxes come due. Dividends are taxed at the per-share earnings distributions that companies make out of their quarterly earnings. Many investors instruct their mutual fund to automatically reinvest their dividends. This means that the fund uses the money to buy more shares in your name. Even if you reinvest and never get a penny of the dividends, they are subject to tax, according to the IRS. Another reason you may get a tax bill is due to high turnover. Turnover measures the frequency with which a fund manger buys and sells shares, sometimes in search of the next high-flying stock or undervalued stock on the verge of taking off. According to Lipper, the average fund in 2000 showed a turnover rate of 122%. This means that the entire portfolio changed between January and December, and 22% of the replacement shares changed as well. This is the ultimate case of account churning! You simply have to understand that when you buy into a fund you are buying into a tax liability. The best way to avoid these taxes altogether is to restrict your purchases of mutual funds to your 401(k) and try to only buy indexed mutual funds such as the Vanguard 500 (FINX).
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More Articles:1. Exercise the right way - dumbbell lunges Other articles in this series looked at a number of exercises, mainly from the perspective of developing a comprehensive muscle building program. Sometimes we take things for granted, especially when it comes to performing the basic exercises that constitute the core of most bodybuilders' training regimes.It is useful, therefore, to describe in detail the processes involved in actually doing these exercises. This will help beginners to start out using the correct techniques before moving on to p… 2. A Guide to Treadmill Reviews By Bob Hett Are you in need of some good exercise, but you don't want to miss your favorite shows by going to the gym? If that is the case, you may be interested in getting a treadmill. With your own treadmill, you can exercise and watch TV at the same time! If you aren't sure about which treadmill to get, let this be your guide to treadmill reviews.There are many places to go to learn about treadmill reviews. Most of these treadmill reviews go over several aspects. Some treadmill reviews go over… 3. Fat Burning Workout To succeed with an aerobic fat burning workout or cardiovascular exercise fitness program, you need to pay attention to the following issues * The frequency at which you perform the workout * The intensity of your workout * your motivation for exercising * the duration of the exercise First learn the basics, then perform the program. If you follow the guidelines below along with your exercise you will succeed. Frequency The keys to weight loss and fitness are * decent eating habits * aerob… 4. 5 Action Ideas To Get Big Fast Are you sick and tired of picking up that latest body building magazine off the shelve, opening it to the latest program on the current bodybuilding star and discovering that he is using a six day split program that has you in the gym for four hours and day!! What it won't tell you is that the guy is a professional and probably doesn't have to hold down a steady job, pay off a mortgage or raise a couple of kids. The thing is you don't have to train like an athlete to put on muscle, all y… |
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