How will capital gains and dividend distributions affect my taxes?
Shareholders are required to pay taxes on mutual fund distributions, both reinvested and paid out in cash, except when earned on qualified retirement accounts (i.e., 401(k), 403(b), IRA). If dividend and capital gain distributions are taken in cash on a qualified account, this is considered a distribution from the account and may be a taxable distribution. Dividend distributions are taxed at ordinary income tax rates unless the dividends are qualified dividends. Qualified dividends are dividends that the mutual fund has received from certain domestic and foreign corporations. Qualified dividends are taxed at the same rates as long-term capital gains. Long-term (held more than one year) capital gains distributions are taxed at long-term capital gains tax rates; distributions of short-term (held one year or less) capital gains are taxed at the same rates as ordinary income. Ordinary income tax rates are generally higher than long-term capital gains tax rates.