Did I get screwed in taxes on a mutual fund dividend payment?
"How is that possible?? The mutual fund doesn't pay taxes and passes along the tax bill to shareholders via distributions would be the short answer. Your basis likely changed as now you have bought more shares. But I gained absolutely nothing from my dividend, so how is it   taxable? The fund has either realized capital gains, dividends, interest or some other form of income that it has to pass along to shareholders as the fund doesn't pay taxes itself. Did I get screwed the first year because I bought into the fund too   late in the year? Perhaps if you don't notice that your cost basis has changed here so that you'll have lower taxes when you sell your shares.  Is anyone familiar with what causes this kind of situation of   receiving a ""taxable dividend"" that doesn't actually increase the   account balance? Yes, I am rather familiar with this. The point to understand is that the fund doesn't pay taxes itself but passes this along. The shareholders that hold funds in tax-advantaged accounts like 401ks and IRAs still get the distribution but are shielded from paying taxes on those gains at that point at time. Is it because I bought too late in the year?  No, it is because you didn't know the fund would have a distribution of that size that year. Some funds can have negative returns yet still have a capital gains distribution if the fund experiences enough redemptions that the fund had to sell appreciated shares in a security. This is part of the risk in having stock funds in taxable accounts. Or is it because the fund had a negative return that year?  No, it is because you don't understand how mutual funds and taxes work along with what distribution schedule the fund had. Do I wait until after the distribution date this year to buy? I'd likely consider it for taxable accounts yes. However, if you are buying in a tax-advantaged account then there isn't that same issue." No, not screwed. This is just an artifact of the tax code and year end dividends.  You paid a tax, and in return, got a higher basis. When you sell, you will have less profit, therefore less tax to pay than the guy who bought right after the dividend.  You can call the fund company if you want to buy later this year. Once you understand the process, it might not bother you at all.
There is little difference between buying shares in your broker's index fund and shares of their corresponding ETF.  In many cases the money invested in an ETF gets essentially stuffed right into the index fund (I believe Vanguard does this, for example).  In either case you will be paying a little bit of tax.  In the ETF case it will be on the dividends that are paid out.  In the index fund case it will additionally be on the capital gains that have been realized within the fund, which are very few for an index fund.  Not a ton in either case.  The more important tax consideration is between purchase and sale, which is the same in either case. I'd say stick it wherever the lowest fees are. (All for US.) Yes you (will) have a realized long-term capital gain, which is taxable. Long-term gains (including those distributed by a mutual fund or other RIC, and also 'qualified' dividends, both not relevant here) are taxed at lower rates than 'ordinary' income but are still bracketed almost (not quite) like ordinary income, not always 15%. Specifically if your ordinary taxable income (after deductions and exemptions, equivalent to line 43 minus LTCG/QD) 'ends' in the 25% to 33% brackets, your LTCG/QD income is taxed at 15% unless the total of ordinary+preferred reaches the top of those brackets, then any remainder at 20%. These brackets depend on your filing status and are adjusted yearly for inflation, for 2016 they are: * single 37,650 to 413,350 * married-joint or widow(er) 75,300 to 413,350 * head-of-household 50,400 to 441,000 (special) * married-separate 37,650 to 206,675 which I'd guess covers at least the middle three quintiles of the earning/taxpaying population.  OTOH if your ordinary income ends below the 25% bracket, your LTCG/QD income that 'fits' in the lower bracket(s) is taxed at 0% (not at all) and only the portion that would be in the ordinary 25%-and-up brackets is taxed at 15%. IF your ordinary taxable income this year was below those brackets, or you expect next year it will be (possibly due to status/exemption/deduction changes as well as income change), then if all else is equal you are better off realizing the stock gain in the year(s) where some (or more) of it fits in the 0% bracket. If you're over about $400k a similar calculation applies, but you can afford more reliable advice than potential dogs on the Internet. (update) Near dupe found: see also How are long-term capital gains taxed if the gain pushes income into a new tax bracket?  Also, a warning on estimated payments: in general you are required to pay most of your income tax liability during the year (not wait until April 15); if you underpay by more than 10% or $1000 (whichever is larger) you usually owe a penalty, computed on Form 2210 whose name(?) is frequently and roundly cursed. For most people, whose income is (mostly) from a job, this is handled by payroll withholding which normally comes out close enough to your liability. If you have other income, like investments (as here) or self-employment or pension/retirement/disability/etc, you are supposed to either make estimated payments each 'quarter' (the IRS' quarters are shifted slightly from everyone else's), or increase your withholding, or a combination. For a large income 'lump' in December that wasn't planned in advance, it won't be practical to adjust withholding. However, if this is the only year increased, there is a safe harbor: if your withholding this year (2016) is enough to pay last year's tax (2015) -- which for most people it is, unless you got a pay cut this year, or a (filed) status change like marrying or having a child -- you get until next April 15 (or next business day -- in 2017 it is actually April 18) to pay the additional amount of this year's tax (2016) without underpayment penalty. However, if you split the gain so that both 2016 and 2017 have income and (thus) taxes higher than normal for you, you will need to make estimated payment(s) and/or increase withholding for 2017. PS: congratulations on your gain -- and on the patience to hold anything for 10 years! I believe that tax will be withheld (at 30%?) on dividends paid to non-residents.  You can claim it back if your country has a tax treaty with the USA, but you will need to file.  You probably also need to file a W-series withholding form (eg a W9-BEN). Interesting question.  I would like to hear a more definitive answer. "If you file the long-form Form 2210 in which you have to figure out  exactly how much you should have had withheld (or paid via quarterly payments of estimated tax), you might be able to reduce the underpayment penalty somewhat, or possibly eliminate it entirely.  This often happens because some of your income comes late in the year (e.g. dividend and capital gain distributions from stock mutual funds) and possibly because some of your itemized deductions come early (e.g. real estate tax bills due April 1, charitable deductions early in the year because of New Year resolutions to be more philanthropic) etc.  It takes a fair amount of effort to gather up the information you need for this (money management programs help), and it is easy to make mistakes while filling out the form. I strongly recommend use of a ""deluxe"" or ""premier"" version of a tax program - basic versions might not include Form 2210 or have only the short version of it. I also seem to remember something to the effect that the long form 2210 must be filed with the tax return and cannot be filed as part of an amended return, and if so, the above advice would be applicable to future years only. But you might be able to fill out the form and appeal to the IRS that you owe a reduced  penalty, or don't owe a penalty at all, and that your only mistake was not filing the long form 2210 with your tax return and so please can you be forgiven this once? In any case, I strongly recommend paying the underpayment   penalty ASAP because it is increasing day by day due to   interest being charged.  If the IRS agrees to your eloquent   appeal, they will refund the overpayment." Milliondollarjourney.com has a couple of articles on this topic. How Investing Taxes Work part 1 and part 2. The following is a summary of that article. Capital gains and dividends are taxed at a preferred rate, while interest tax is taxed at your regular rate. Interest is taxed at your marginal rate, but capital gains are taxed at only 50% of your marginal rate. That means that it makes sense to place the interest bearing account inside the RRSP but keep stocks outside. Additionally, you can claim your losses on your capital appreciating stocks against your gains if they are outside of your RRSP. Hopefully, your stocks will never go down but that's not very realistic. Dividends from Canadian companies are eligible for a dividend tax credit, but not dividends from foreign companies. [I actually understood that dividends from U.S. companies are treated as a special case] It's not clear to me from reading the article how much of this applies to mutual funds. The summary is as follows: "First, consider what causes taxes to apply to a mutual fund, index or actively managed.  Dividends and capital gains are generally what will be distributed to shareholders given the nature of a mutual fund since the fund itself doesn't pay taxes.  For funds held in IRAs or other tax-advantaged accounts, this isn't a concern and thus people may not have this concern for those situations which can account for a lot of investing situations as people may have 401(k)s and IRAs that hold their investments rather than taxable accounts. Second, there can be tax-managed funds so there can be cases where a fund is managed with taxes in mind that is worth noting here as what is referenced is a ""Dummies"" link that is making a generalization.  For taxable accounts, it may make more sense to have a tax-managed fund rather than an index fund though I'd also argue to be careful of asset allocation as to maintain a purity of style can require selling of stocks that grow too big and thus trigger capital gains,e.g. small-cap and mid-cap funds that can't hold onto the winners as they would become mid-cap and large-cap instead of representing the proper asset class. A FUND THAT PLAYED IT SAFE--AND WAS SORRY would be a Businessweek story from 1998 of an actively managed fund that went mostly to cash and missed the rise of the stock market at that time if you want a specific example of what an actively managed fund can do that an index fund often cannot do.  The index fund is to track the index and stay nearly all invested all the time." Does my prior answer here to a slightly different question help at all? Are there capital gains taxes or dividend taxes if I invest in the U.S. stock market from outside of the country? If you receive dividends on an investment, those are taxed. "According to the IRS, you must have written confirmation from your broker ""or other agent"" whenever you sell shares using a method other than FIFO: Specific share identification.   If you adequately identify the shares   you sold, you can use the adjusted basis of those particular shares to   figure your gain or loss. You will adequately identify your mutual fund shares, even if you   bought the shares in different lots at various prices and times, if   you: Specify to your broker or other agent the particular shares to be sold or transferred at the time of the sale or transfer, and Receive confirmation in writing from your broker or other agent within a reasonable time of your specification of the particular   shares sold or transferred. If you don't have a stockbroker, I'm not sure how you even got the shares. If you have an actual stock certificate, then you are selling very specific shares and the purchase date corresponds to the purchase date of those shares represented on the certificate." "This is why California tax code is even more messed up than the Federal - they take the Federal and then add some. Or remove. Or mix up. Whether your brokerage will send 1099 or not is up to the brokerage. Its a Federal requirement. California may require them to send it out for CA residents, or may not. They may adhere to the FTB, or may not. It doesn't matter to you. You'll have to keep track of the interest and dividends received, cost basis for the securities, etc etc., just as any other brokerage account. You cannot rely solely on the information on the 1099 anyway, since it doesn't include many things you have to take into account for your Federal tax return as well, wash sales (inter-brokerage) being the most obvious example. As to what happens when you're 65 - you'll have to keep track, again, of all the taxes paid, and track your California basis in the account, and your Federal basis in the account, and they will not be  the same. Reconciliation time again when you get there. What a mess. If you move to another state - the taxes you paid to CA are ""lost"".  Similarly, if you move in to California, all the gains prior to moving in are not taxed by California. Whatever happens after - is taxed by CA as if it was a regular investment account." Okay thanks, let's hope it's a relatively painless process to correct my mistake!   Really odd that my 401(k)s are traditional, I was so sure they weren't.  Maybe it's better then to open up a traditional IRA alongside the Roth, use that for rollovers, and just kick a few bucks into the Roth on occasion? "Your ""money market"" is cash or a ""sweep account"" that your broker is holding for you and on which the broker is paying you interest.  The mutual fund is paying you dividends, not interest, even if it is a money-market mutual fund (often bearing a name such as Prime Reserve Fund) or bond mutual fund that is collecting interest on its investments and passing them on to you." There are a few incorrect assumptions in your question but the TL;DR version is: All, or most, of the withdrawal is taxable income that is reported on Lines 15a (total distribution) and 15b (taxable amount) of Form 1040. None of the distribution is given special treatment as Qualified Dividends or Capital Gains regardless of what happened inside the IRA, and none of the distribution is subject to the 3.8% Net Investment Income Tax that some high-income people need to compute on Form 8960. If the withdrawal is not a Qualified Distribution, it will be subject to a 10% excise tax (tax penalty on premature withdrawal). Not all contributions to Traditional IRAs are deductible from income for the year for which the contribution was made. People with high income and/or coverage by a workplace retirement plan (pension plan, 401(k) plan, 403(b) plan, etc) cannot deduct any contributions that they choose to make to a Traditional IRA. Such people can always make a contribution (subject to them having compensation (earned income such as salary or wages, self-employment income, commissions on sales, etc), but they don't get a tax deduction for it (just as contributions to Roth IRAs are not deductible). Whether it is wise to make such nondeductible contributions to a Traditional IRA is a question on which reasonable people can hold different opinions.  Be that as it may, nondeductible contributions to a Traditional IRA create (or add to) what is called the basis of an IRA. They are reported to the IRS on Form 8606 which is attached to the Federal Form 1040.  Note that the IRA custodian or trustee is not told that the contributions are not deductible. Earnings on the basis accumulate tax-deferred within the IRA just as do the earnings on the deductible contributions. Now, when you make a withdrawal from your Traditional IRA, no matter which of your various IRA accounts you take the money from, part of the money is deemed to be taken from the basis (and is not subject to income tax) while the rest is pure taxable income. That is, none of the rest is eligible for the reduced taxation rates for Qualified Dividends or Capital Gains and since it does not count as investment income, it is not subject to the 3.8% Net Investment Tax of Form 8960 either. Computation of how much of your withdrawal is nontaxable basis and how much is taxable income is done on Form 8606. Note that you don't get to withdraw your entire basis until such time as when you close all your Traditional IRA accounts. How is all this reported? Well, your IRA custodian(s) will send you Form 1099-R reporting the total amount of the withdrawal, what income tax, if any, was withheld, etc. The custodian(s) don't know what your basis is, and so Box 2b will say that the taxable amount is not determined. You need to fill out Form 8606 to figure out what the taxable amount is, and then report the taxable amount on Line 15b of Form 1040. (The total withdrawal is reported on Line 15a which is not included in the AGI computations). Note that as far as the IRS is concerned, you have only one Traditional IRA. The A in IRA stands for Arrangement, not Account as most everybody thinks, and your Traditional IRA can invest in many different things, stocks, bonds, mutual funds, etc with different custodians if you choose, but your basis is in the IRA, not the specific investment that you made with your nondeductible contribution. That's why the total IRA contribution is limited, not the per-account contribution, and why you need to look that the total value of your IRA in determining the taxable portion, not the specific account(s) from which you withdrew the money. So, how much basis did you withdraw?  Well, if you withdrew $W during 2016 and the total value of all your Traditional IRA accounts was $X at the end of 2016 and your total basis in your Traditional IRA is $B, then (assuming that you did not indulge in any Traditional-to-Roth rollovers for 2016), multiply W by B/(W+X) to get the amount of nontaxable basis in the withdrawal. B thus gets reduced for 2017 by amount of basis withdrawal. What if you never made a nondeductible contribution to your Traditional IRA, or you made some nondeductible contributions many years ago and have forgotten about them? Well, you could still fill out Form 8606 reporting a zero basis, but it will just tell you that your basis continues $0. Or, you could just enter the total amount of your withdrawal in Lines 15a and 15b, effectively saying that all of the withdrawal is taxable income to you. The IRS does not care if you choose to pay taxes on nontaxable income. "While @JB's ""yes"" is correct, a few more points to consider: There is no tax penalty for withdrawing any time from a taxable investment, that is, one not using specific tax protections like 401k/IRA or ESA or HSA. But you do pay tax on any income or gain distributions you receive from a taxable investment in a fund (except interest on tax-exempt aka ""municipal"" bonds),  and any net capital gains you realize when selling (or technically redeeming for non-ETF funds). Just like you do for dividends and interest and gains on non-fund taxable investments. Many funds have a sales charge or ""load"" which means you will very likely lose money if you sell quickly typically within at least several months and usually a year or more, and even some no-load funds, to discourage rapid trading that makes their management more difficult (and costly), have a ""contingent sales charge"" if you sell after less than a stated period like 3 months or 6 months.  For funds that largely or entirely invest in equities or longer term bonds, the share value/price is practically certain to fluctuate up and down, and if you sell during a ""down"" period you will lose money; if ""liquid"" means you want to take out money anytime without waiting for the market to move, you might want funds focussing on short-term bonds, especially government bonds, and ""money market"" funds which hold only very short bonds (usually duration under 90 days), which have much more stable prices (but lower returns over the longer term)." I can see your point.  There are more investors than investment banks, so the power of each investment bank is substantially more than each individual investor.  It would take a lot of coordinated effort on the part of investors to alter the balance of power.  And to an extent, a new or existing and improved ratings agency would be a proxy war between investors and investment banks, even though the direct competition would be with other ratings agencies.  At the same time, ratings agencies as an industry have never had less credibility, nor have the investment banks for that matter.  I have to believe there is a realistic way to exploit that reality.