if your investing in a for the long run, and dont plan on making any withdrawals for 10 years, do you still have to pay taxes on your profits yearly, or only when you withdraw it in 10 years?

 

  • ninasgramma 11:58 am on March 13, 2010 Permalink

    You pay taxes yearly and you pay taxes when you sell, if you have a gain.

    If your mutual fund holds stocks, and those stocks pay dividends, then you will receive your portion of those dividends. Even if you do not take those payments in cash, but reinvest them in the fund, you will pay taxes on the dividends each year.

    If the stock mutual fund sells some of the stock that it holds, and that sale results in a capital gain (maybe short, or maybe long-term), then even though you haven’t sold your shares, you will get a distribution of capital gains. Even if you do not take these gains in cash, but reinvest the gains, you will pay tax on the capital gains each year.

    Finally, when you sell your shares of the fund, you will pay tax on the gain when you sell. This gain is the difference of the proceeds of the sale and your investment in the fund, your "basis." Your basis includes your direct investment and any re-investments you have made from the dividends and capital gains.

    If your mutual fund holds bonds, or is a money market fund, and you receive interest payments, then you pay tax on those interest earnings even though you don’t take the interest in cash but reinvest it in the fund. The tax on the sale is the same as for a stock fund.

  • Mathew 11:58 am on March 13, 2010 Permalink

    When you make a withdrawal. Mutual funds are sometimes rather difficult when you attempt to determine basis so keep all of your records.

  • PepsiLime 11:58 am on March 13, 2010 Permalink

    You will more than likely receive a 1099 at the end of the year indicating how much income you have earned from dividends and capital gains distributions. You will need to report that information on your 1040 and also a state return if you have a state income tax. If you reinvest those dividends and/or capital gains distributions you will need to keep track of that information as that will become part of the cost of your mutual funds, in addition to your original purchase. Then when you go to sell some or all of your mutual funds you will have your correct cost basis. I am a CPA/Tax Preparer and I have had a number of people when they sell their mutual funds tell me how much they paid for the mutual funds originally, but have no clue how much was reinvested over the years, and then I have to research that, which adds to the bill.