: What taxes do I pay when investing in mutual funds apart from retirement? I have some extra income that I would like to put into mutual funds, instead of leaving it in a 1% interest savings account (best I could find right

Vote Up Vote Down   0 Reactions

Login to give Reaction!

If you buy and hold a mutual fund there are three areas on which you are subject to taxes:

Dividends
Short-term capital gains
Long-term capital gains

At the risk of being overly political there is often a debate over the marginal rate of for dividends and long-term capital gains. Conservatives are attempting to hold the rate at 15% where progressives are attempting to increase the rate to your top marginal rate. I'll leave the nuances of the argument for another post. The important part is, right now, those are taxed at 15%.

The consensus is that short-term capital gains should be taxed at your top marginal rate. According to the rhetoric having short term capital gains (even if held for 9 months) makes you a "day-trader" and you should be punished.

You will receive a statement from your mutual fund that outlines what amounts are dividend, long and short term capital gains.

You can also be hit with capital gains once you redeem your mutual funds. Depending on the length you held your shares will determine if they are long or short term capital gains.

So there is an added benefit to doing what you are seeking. As long as the current political climate exists, you will pay far less taxes on some portion of what you earn in a mutual fund.