When you hold mutual fund shares in a taxable account, failing to keep track of the details could result in a bigger income-tax bite. Here are some things to remember.
Your Cost Basis. Distributions of capital gains and dividends generally are taxable, even if you use them to purchase additional shares. So, when you’re figuring gains and losses, don’t forget to add reinvested income and capital gains to your original cost basis. Forgetting to add them to your cost basis means you’ll pay taxes on them twice, since those distributions have already been taxed.
The Ex-dividend Date. Pay close attention to investing in a fund around its ex-dividend date. Investing right before distributions are made (generally near year’s end) means that part of your investment will be immediately returned to you as a taxable distribution. Check with the fund company to find out approximately when year-end distributions will occur.
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You should consider the fund’s investment objectives, charges, expenses, and risks carefully before you invest. The fund’s prospectus, which can be obtained from your financial representative, contains this and other information about the fund. Read the prospectus carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost,