[jively]

[ QUOTE ]
Thanks for this information. Is it correct that as long as you keep the money in the funds you have invested in you will not incur any taxes until you sell the interest in the funds? Or do you receive annual payments for dividends or the like on these funds (I am guessing they just stay in the fund, so no taxes are incurred but not sure).

Also with respect to the bond funds - if holding in the fund avoids taxes until you liquidate (unless, again, there are payouts in the form of dividends or interest), would a long term investor ever really be better off in tax-exempts as is suggested later in this thread?

[/ QUOTE ]
If you are holding a mutual fund in a non-retirement (taxable) account, you do not have to pay tax based on the appreciation of the fund until you sell it. However, the funds distribute their interest, dividends, and their capital gains to their investors every year. For stock funds, much of this (dividends and long-term capital gains) will be at a lower tax rate. For bond funds and REITs, most of the income will be at your ordinary tax rate.

For high tax bracket investors, you should consider muni bond funds instead of taxable bond funds. When bond funds are sold, there may be a small capital gain or capital loss, even if you use a muni bond fund. (If you use short- and intermediate-term funds that have high quality bonds, this gain or loss should be pretty small.) However, as I said, most of the income is interest income that is taxed each year at your marginal rate.

-Tom