What is a mutual fund capital gain distribution?
A realized capital gain occurs for a mutual fund when the difference between the price paid for a security and the price for which it is sold results in a profit. Mutual funds net realized capital gains against realized capital losses. Net realized gains, if any, are distributed to shareholders.
Generally, a mutual fund incurs two types of capital gains: short-term and long-term. Short-term capital gains are any gains realized from the sale of securities within a fund that the fund has held for one year or less. Net realized short-term gains are included with the ordinary dividend and taxed at ordinary income tax rates. Net realized long-term capital gains are net gains from the sale of securities held by a fund for more than one year. Long-term gains are currently taxed at a maximum rate of 15%. Mutual funds that invest in real estate investment trusts may pay "Unrecaptured Section 1250 gains" which may be taxed at a rate of 25%.
Why does a mutual fund pay capital gain distributions?
Capital gains are distributed to shareholders only after a fund has used up its current losses and any carry-forward losses from prior years. A mutual fund is required by law to distribute net capital gains to shareholders, generally based on an Oct. 31 year, by the end of the calendar year. These capital gain distributions typically occur once a year. If a mutual fund has net capital losses at the end of its fiscal year, those losses carry forward to offset gains in future years.
Why are there capital gain distributions in a down market?
Capital gain distributions can be made because of net gains earned in the current year or in the fund's prior fiscal year. Even in a current down market, there can be gains that are required to be distributed for the prior fiscal year when securities were trading at higher values. Capital gains typically are distributed to shareholders only after a fund has used up any carry-forward losses from prior years.
How does a capital gain distribution impact the share price of a mutual fund?
The capital gains earned from selling securities in a mutual fund accumulate and help raise the share price of the mutual fund. When the capital gains are paid out of the mutual fund to a shareholder, the fund's share price, or net asset value (NAV), is reduced by the amount of the capital gain distribution.
Example: If a fund has an NAV of $20 per share and makes a capital gain distribution of $2 per share at the end of the year, the NAV will be reduced by the $2 and paid to shareholders on a specified payment date. On that payment date, the fund's share price will be reduced to $18.
When are capital gains distributed?
Click on the link below for the distribution schedule for RiverSource® mutual funds. Please consult the December column for capital gains payment dates.
How do capital gains work in a tax-qualified account vs. a non-qualified account?
Shareholders who own mutual fund shares through a tax-qualified account (tax-deferred account such as a 401(k) or Traditional or Roth IRA) do not pay taxes on capital gain distributions currently. Income from 401(k) or traditional IRA accounts is generally taxed as ordinary income when withdrawals are made. Earnings on Roth accounts may also be taxed if holding period requirements are not met.
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This information is for use with concurrent or prior delivery of a fund prospectus. Investors should consider the investment objectives, risks, charges and expenses of a mutual fund carefully before investing. To learn more about this and other important information about each fund, download a free prospectus. The prospectus should be read carefully before investing.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.
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RiverSource®, Seligman® and Threadneedle® mutual funds are distributed by Columbia Management Investment Distributors, Inc. (formerly known as RiverSource Fund Distributors, Inc.), member FINRA and managed by Columbia Management Investment Advisers, LLC (formerly known as RiverSource Investments, LLC). Threadneedle mutual funds are subadvised by Threadneedle International Limited, an affiliate of Columbia Management. Seligman is an offering brand of Columbia Management.