Mutual Fund/ETF dist. in Taxable Account

[maddythebeagle]

This question came up with the discussion of dividend income taxation. I use a lot of drip plans to invest (no selling, mainly buy and hold and reinvest dividends and dollar cost average and buy more on dips).

The question is this: if you have index funds or etfs in a taxable account, how are the distributions counted. I have never had a fund outside of a tax deferred account. Dont you have to pay taxes every year on dividends and gains on turnover in the fund. How much and at what rates? Similar to rates for dividend income from individual stocks?

 

[cute fuzzy bunny]

Funds generate dividends and capital gains/losses.

Some funds are 'tax managed' and offset gains with limited selling and offsetting loss selling.

Otherwise, any qualified dividends (most dividends paid by stocks in the fund) thrown off from that fund are taxed in that tax year at 5 or 15%, depending on your income level. Unqualified dividends (most bond dividends and cash instrument payouts) are taxed as regular income at your regular rate. Long and short term capital gains thrown off the fund are taxed in that tax year as plain old long and short term gains, just like stock sales.

There are some minor exceptions to these rules.