What happens to the dividends paid by stocks held in a mutual fund?

Question

Does the fund serve as sort of a tax-deferred account, in which the dividends can accumulate without the owner having to realize the gains until the fund is sold (rather than each time the dividend is paid)? This would seem to a major advantage of mutual funds, but I have never heard this mentioned

Answer 1

A mutual fund company with send you appropriate tax slips once a year when distributions are made.

If it is in a registered acct, the dividends will buy more shares unless directed to contrary.

In a non registered acct, you can have the dividends sent to you, or have it buy more shares...either way you will get a advice slip for your taxes.

Answer 2

Dividends are distributed to the funds shareholders.  If the fund is not in a tax deferred account like an IRA then then the holders must pay taxes on them.

Answer 3

Just like in a personal portfolio...the funds receive the dividends for shares that they hold...and it goes into a " cash" portion of the fund.

They can invest it, they can hold it in cash...whatever they do it it still counted as gains...and will be distributed to fund shareholders as part of the dividends and capital gains at the end of the year. That is where the individual will pay taxes on the dividends...from his/her statement from the mutual fund at year's end.

If you sell at any time during the year, you will still recieve a statement from the fund .

Of course no taxes are paid on it if is held in an IRA or 401.... taxation comes upon withdrawal...  or never... in the case of a ROTH IRA.

Answer 4

If you're in Canada it's the same as what Jeff said.  Unless it's in an RRSP or other Tax sheltered product, you would be taxed on the dividends.  A mutual fund itself is not a tax shelter, nor is it tax deferred.