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.
If you put it in a normal account it is (1) taxed as ordinary income now and then (2) any growth is taxed again at the capital gains rate.  Additionally, (3) any dividends will be taxed each year.  If you put it in a 401(k), you will only be taxed once, at the ordinary income rate.   Mathematically, if you start with X and have a regular tax rate of t and capital gains rate of g and your investments return r and there are n years to retirement, then your total wealth if you put it in a mutual fund (ignoring annual taxes on dividends) will be While if you used a 401(k) it would simply be The whole g term (along with any annual taxes on dividends) is gone in the second case and that's potentially a lot of taxes.  The 401(k) is much better in terms of total wealth unless tax rates dramatically rise between now and when you retire so that the t in the second case is much higher than in the first. This is virtually never the case for people retiring now.  Of course, what tax rates the future holds, we do not know. If you want to go far upstream, you can get mutual fund NAV and dividend data from the Nasdaq Mutual Fund Quotation Service (MFQS). This isn't for end-users but rather is offered as a part of the regulatory framework. Not surprisingly, there is a fee for data access. From Nasdaq's MFQS specifications page: To promote market transparency, Nasdaq operates the Mutual Fund Quotation Service (MFQS). MFQS is designed to facilitate the collection and dissemination of daily price, dividends and capital distributions data for mutual funds, money market funds, unit investment trusts (UITs), annuities and structured products. Dividends from mutual funds reduce the share value the day they are distributed.   Mutual funds do this at least once a year, or more times in the year if there are a lot of gains, to pass through taxable gains to individuals who may have lower tax rates or deferred tax accounts such as you. This is meaningful for investors who hold the mutual funds in taxable accounts,  but immaterial for 401ks.  Your account balance is not affected if you don't get the distribution before roll over. For the Roth the earnings: interest, dividends, capital gains distributions and capital gains are tax deferred. Which means that as long as the money stays inside of a Roth or is transferred/rolled over to another Roth there are no taxes due. In December many mutual funds distribute their gains. Let's say people invested in S&P500index fund receive a dividend of 1% of their account value. The investor in a non-retirement fund will be paying tax on that dividend in the Spring with their tax form. The Roth and IRA investors will not be paying tax on those dividends. The Roth investor never will, and the regular IRA investor will only pay taxes on it when they pull the money out. may result in more taxes when Fund shares are held in a taxable   account. When the fund manager decides to sell shares of a stock, and those shares have grown in value, that growth is a capital gain. If that fund is part of a taxable account then the investors in the fund will have to declare that income/gain on their tax forms. That could require the investors to have to pay taxes on those gains.  Of course if the investors are holding the fund shares in a IRA or 401K then there are no taxes due in the near term. A higher portfolio turnover rate may indicate higher transaction   costs...  ...These costs, which are not reflected in annual fund operating   expenses or in the previous expense examples, reduce the Fund’s   performance. The annual fund operating expenses are the expenses that they can assume will happen every year. They include salaries, the cost of producing statements, paperwork required by the government, research... It doesn't include transaction costs. Which they can't estimate what they will be in advance. If the fund invests in a particular segment of the market, and there is a disruption in that segment, they may need to make many new investments. If on the other hand last year they made great choices the turnover may be small this year. During the most recent fiscal year, the Fund’s portfolio turnover rate   was 3% of the average value of its portfolio. That may be your best indicator. First of all, in the U.S., no Federal gift tax has to be paid by the recipient of  the gift; it is the donor who has to pay gift tax, if any is due. Nor does the recipient have to pay Federal income tax on the gift; it is not considered taxable income.  I do not believe that any states view matters differently for the purposes of state gift and income taxes, but I am always ready to be disabused of any such fondly-held notions. If your parents were required to pay any gift tax, that would have been at the  time the gift was originally given and only if they gifted more than the maximum allowable exemption per person for that year. Currently the exemption is $14K from each donor per recipient per year. Additional gifts were made by your parents to you during your minority when your parents paid any income tax  due on the distributions in your account, but these amounts would unlikely to have been larger than the exemption for that year. In any case, gift tax is  none of your concern. If you have been declaring the income from distributions from the mutual funds all these years, then the only tax due on the distributions from the funds in 2013 is the Federal income tax for the 2013 tax year (plus a special assessment of Medicare tax on investment income if your income is large; unlikely based on your question and follow-up comment).  If you sold all or part of your shares in the funds in 2013, then you would need to calculate the basis of your investments in the fund in order to figure out if you have capital gains or losses.  Ditto if you are thinking of cashing out in 2014 and wish to estimate how much income tax is due. But if you want to just hang on to the funds, then there is no immediate need to figure out the basis right away, though taking care of the matter and keeping in top of things for the future will be helpful. As a final note, there is no tax due on the appreciation of the fund's shares. The increased value of your account because the fund's share price rose is not a taxable event (nor are decreases in the account deductible). These are called unrealized capital gains (or losses) and you do not pay tax on them (or deduct them as losses) until you realize the gains by  disposing of the property. Would I be taxed at my personal income tax rate upon withdrawal of the   funds for this loan from my professionally managed, balanced 401k (not   Roth funds)? Yes. This is a regular distribution. Why wouldn't you be taxed? What's gifting has to do with anything? If taxable, this would move me to the next higher tax bracket. Depending on your other income - it may, or may not. Whether or not taxable when pulling funds out of the investment   account, when I'm repaid, do I owe Federal tax only on the interest   income portion of repayment funds or on the lump sum & interest   received (all of which which would return to my retirement account in   lump)? Only interest. And you will not return it to your retirement account. Not in a lump and not in installments and not in any other way. Sorry, it appears not, according to http://www.nysscpa.org/cpajournal/2008/508/perspectives/p12.htm: ...and the election to make Roth 401(k) contributions (these are after-tax contributions) is irrevocable.  Fairmark says the same thing. PS, don't complain too loudly, given the reason for the problem. :)