Coins in Stacks

Mutual Fund Distributions

Coins in Stacks

Once you are invested and relaxed, an understanding of distributions of dividends and capital gains is important for taxable investors.

Dividend distributions normally occur quarterly for equity funds and most fixed income funds (monthly for a few fixed income funds) and the final quarter of the year is the highest because it also includes capital gains distributions. Fortunately, index mutual funds have a lower tax impact than actively managed mutual funds, so it is relatively less of a concern. The tax implications are only important for taxable accounts. The dates that affect distributions from mutual funds are as follows:

Record Date (for example: December 12th) - If you owned the fund making a distribution on this date, the Ex-Dividend Date and Payable Date amounts will apply to you.

Ex-Dividend Date (for example: December 13th) - This is when a particular fund makes adjustments for its planned distributions to Shareholders. The value of your account temporarily declines because the NAV (Net Asset Value) of each fund is reduced by the planned amount of distribution on the Payable Date.

Payable Date (for example: December 17th) - This is last date when the fund is required to pay the distribution to shareholders, although is most often actually paid earlier. The distribution amount is reinvested automatically in additional shares of the fund (unless you have chosen to receive them in cash).

1) Your account net value will be unchanged because the NAV for each fund is temporarily reduced on the Ex-Dividend Date, but then distributions are reinvested in additional shares (at the lower NAV) on the Payable Date, resulting in an account increase amount equal to the distribution, so it is "a wash" for the value of your account.

2) (For Taxable Accounts Only) Your taxable gains are increased by the distribution amounts whether paid in cash or reinvested. Even if you bought the fund shortly before the taxable distribution, the tax applies to you. This is the process that mutual funds are required to follow to pass along profits to shareholders. Because you are paying taxes on distributions, a positive result is that your cost basis increases by that amount so that future taxes are lower if you eventually sell the fund.
It is IFA’s practice to withhold purchasing those funds in taxable accounts whose estimated tax hits exceed their average return (over the last 50 years) for the time period in question. The estimated tax hits are calculated from the estimated distributions provided by the mutual fund company. In a typical year, IFA will cease purchases of fixed income and REIT funds about one month before the December distribution date, and IFA will cease purchase of international and emerging markets funds about two to three weeks prior to the December distribution data. IFA will cease purchases of all funds in taxable accounts on the Monday prior to the December distribution date and resume purchases on or after the ex-dividend date.

This is not intended to be a complete explanation of the distribution process or a tax guide, and you should consult your tax advisor for your specific situation.