Author Topic: Do You Consider Mutual Fund Distribution part of your passive income?  (Read 1791 times)

Bman23

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And really, are these really any different than dividends?  They tend to have more of a negative connotation, but both decrease the value of thefund (temporarily) and are a tax liability.

Abe

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Re: Do You Consider Mutual Fund Distribution part of your passive income?
« Reply #1 on: February 26, 2017, 09:29:21 PM »
I would - but hopefully they are a minor part of your funds are efficient with avoiding them.

Bman23

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Re: Do You Consider Mutual Fund Distribution part of your passive income?
« Reply #2 on: February 27, 2017, 09:32:10 AM »
I am still slightly confused.  Why are capital gains distributions "bad" and dividends "good"?  They are both money that is reinvensted (theoretically) and taxed.

AdrianC

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Re: Do You Consider Mutual Fund Distribution part of your passive income?
« Reply #3 on: February 27, 2017, 02:41:44 PM »
One reason: cap gain distributions aren't predictable. Passive funds don't hardly have any, active funds do but you don't have any control over when, so if you must do active funds you put them in tax-advantaged accounts.


Spork

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Re: Do You Consider Mutual Fund Distribution part of your passive income?
« Reply #4 on: February 27, 2017, 05:57:13 PM »


Short answer: Yes, I do.

I am still slightly confused.  Why are capital gains distributions "bad" and dividends "good"?  They are both money that is reinvensted (theoretically) and taxed.

I assume we're talking about "Nondividend distributions".

They're not "Bad"... They're just not as good as qualified dividends.  I am not a CPA... but my understanding is that non-dividend distributions are not taxable.  But... they reduce your cost basis.  In effect, they have a negative effect on your taxes at some date in the future when you sell the stocks/funds.  In effect, they lump together and will whittle your basis down, making your "profit" larger.

Qualified dividends are taxed at a rate lower than your actual marginal rate.  If you are married/filing jointly, you can make up to $75,900 (2017) and pay zero taxes on dividends/cap gains.

Bman23

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Re: Do You Consider Mutual Fund Distribution part of your passive income?
« Reply #5 on: February 28, 2017, 07:43:33 AM »
Capital gains distributions are definitely taxable.  What's frustrating is, the price of the fund is reduced by 5k if I get a 5k distribution. So now I  have the same amount of money, but owe taxes on 5k.  But I guess I would owe taxes on those 5k later when I sold the fund anyway if the price hadnt dropped.



AdrianC

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Re: Do You Consider Mutual Fund Distribution part of your passive income?
« Reply #6 on: February 28, 2017, 07:57:18 AM »
Capital gains distributions are definitely taxable.  What's frustrating is, the price of the fund is reduced by 5k if I get a 5k distribution. So now I  have the same amount of money, but owe taxes on 5k.  But I guess I would owe taxes on those 5k later when I sold the fund anyway if the price hadnt dropped.
It's far better to defer those taxes a few decades.

Don't put active funds in taxable accounts.

Example: in 2015 the Fairholme fund had a distribution of $12.31/share on a share price of about $50. That can seriously upset your tax planning.

http://www.fairholmefundsinc.com/Bulletin/Distributions2015.pdf

Spork

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Re: Do You Consider Mutual Fund Distribution part of your passive income?
« Reply #7 on: February 28, 2017, 10:43:51 AM »
Capital gains distributions are definitely taxable.  What's frustrating is, the price of the fund is reduced by 5k if I get a 5k distribution. So now I  have the same amount of money, but owe taxes on 5k.  But I guess I would owe taxes on those 5k later when I sold the fund anyway if the price hadnt dropped.

*warning again - I'm no CPA*

I believe you are crossing terms.  "capital gains distributions" are not the same as "non-dividend distributions".  Capital gains distributions are taxed.  They don't reduce your basis though.  Non-dividend distributions are not taxed*, but they reduce your basis.

*They're not taxed as long as your basis is > 0.  Once your basis falls to 0, they become long/short term gains, depending on how long you've held the equity.  It's also not entirely correct for me to say "not taxed" since they reduce your basis.  They're taxed eventually, when you sell.

Reference
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A nondividend distribution reduces the basis of your stock. It is not taxed until your basis in the stock is fully recovered. This nontaxable portion is also called a return of capital; it is a return of your investment in the stock of the company. If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first.
When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock