Mutual Fund Distributions: How Dividend Distributions Are Taxed

Welcome to MutualFunds.com

Please help us personalize your experience and select the one that best describes you.

Your personalized experience is almost ready.

Join other Individual Investors receiving FREE personalized market updates and research. Join other Institutional Investors receiving FREE personalized market updates and research. Join other Financial Advisors receiving FREE personalized market updates and research.

Thank you!

Check your email and confirm your subscription to complete your personalized experience.

Thank you for your submission

We hope you enjoy your experience

Channels

Fixed income news, reports, video and more.

Municipal bonds news, reports, video and more.

Practice management news, reports, video and more.

Portfolio management news, reports, video and more.

Retirement news, reports, video and more.

Learn from industry thought leaders and expert market participants.

Deepen your understanding of Responsible Investing and learn how it can potentially help you build a more successful practice.

Advisors

Receive email updates about fund flows, news, upcoming CE accredited webcasts from industry thought leaders and more.

Content focused on helping financial advisors build successful client relationships and grow their business.

Content geared towards helping financial advisors build better client portfolios.

Get insights on the industry trends and investment news from leading fund managers and experts.

Mutual Fund Distributions: How Dividend Distributions Are Taxed

Dividend and Distributions
Mutual funds are required by law to pass on any income they receive – whether it’s interest from a bond or dividends from a stock – to shareholders in the form of a dividend distribution.
Income received from a mutual fund is generally taxable at the shareholder’s ordinary income tax rate, the notable exception being if the account is held within a tax-advantaged vehicle such an IRA or 401(k), where distributions are tax-deferred or tax-free. Dividend distributions are not, however, always straightforward. Understanding how they break down and how they’re taxed is important to not send too much to Uncle Sam at tax time.

Qualified Dividends vs. Ordinary Dividends

Dividends paid out by mutual funds fall into two categories: qualified and ordinary.

Qualified dividends are ordinary dividends that qualify for a lower tax rate provided that certain criteria are met. Qualified dividends are dividends that come from stocks held by the fund for at least 60 days of the 121-day period that begins 60 days prior to the ex-dividend date. In addition, the dividend must be issued by an American or qualifying foreign company.

Ordinary dividends are those that do not meet the criteria for qualified dividends and get taxed at a higher rate. Ordinary dividends include not only non-qualified equity dividends but also the income generated from bonds, money market securities and bank products. Income from products such as real estate investment trusts (REITs) and master limited partnerships (MLPs) is considered ordinary income.

With the income generator on our sister site Dividend.com, you can search nearly 1,600 dividend stocks that pay dividends in corresponding months.

How Qualified and Ordinary Dividends Are Taxed

Qualified dividends are taxed at the long-term capital gains rate, which is considered more favorable than the tax rate for ordinary dividends. Taxpayers in the 10% and 15% tax brackets pay no tax on qualified dividends. All other taxpayers pay a 15% tax rate on qualified dividends with the exception of those in the highest 39.6% tax bracket. They pay a 20% tax on qualified dividends.

Ordinary dividends are taxed at the taxpayer’s ordinary income tax rate. These rates range from 10% to 39.6%.

Examples of Funds That Make Dividend Distributions

Bond and money-market funds normally make only ordinary dividend distributions. Stock mutual funds, however, can distribute ordinary dividends, qualified dividends or both. Here are five funds that have made dividend distributions in 2016. To get more data on the five mutual funds that pay out dividend distributions, click on their ticker symbol in the table.
Check out the top dividend ETFs at our sister site ETFdb.com.

The Bottom Line

Mutual fund dividend distributions can come from a multitude of sources, making them a bit complicated come tax time. Understanding the difference between ordinary and qualified dividends as well as how they’re taxed is important since it can mean the difference between hundreds of dollars or more in taxes that can be saved.

To learn more about mutual fund distributions, check out our What are Mutual Fund Distributions article.


Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next

Dividend and Distributions

Mutual Fund Distributions: How Dividend Distributions Are Taxed

Mutual funds are required by law to pass on any income they receive – whether it’s interest from a bond or dividends from a stock – to shareholders in the form of a dividend distribution.
Income received from a mutual fund is generally taxable at the shareholder’s ordinary income tax rate, the notable exception being if the account is held within a tax-advantaged vehicle such an IRA or 401(k), where distributions are tax-deferred or tax-free. Dividend distributions are not, however, always straightforward. Understanding how they break down and how they’re taxed is important to not send too much to Uncle Sam at tax time.

Qualified Dividends vs. Ordinary Dividends

Dividends paid out by mutual funds fall into two categories: qualified and ordinary.

Qualified dividends are ordinary dividends that qualify for a lower tax rate provided that certain criteria are met. Qualified dividends are dividends that come from stocks held by the fund for at least 60 days of the 121-day period that begins 60 days prior to the ex-dividend date. In addition, the dividend must be issued by an American or qualifying foreign company.

Ordinary dividends are those that do not meet the criteria for qualified dividends and get taxed at a higher rate. Ordinary dividends include not only non-qualified equity dividends but also the income generated from bonds, money market securities and bank products. Income from products such as real estate investment trusts (REITs) and master limited partnerships (MLPs) is considered ordinary income.

With the income generator on our sister site Dividend.com, you can search nearly 1,600 dividend stocks that pay dividends in corresponding months.

How Qualified and Ordinary Dividends Are Taxed

Qualified dividends are taxed at the long-term capital gains rate, which is considered more favorable than the tax rate for ordinary dividends. Taxpayers in the 10% and 15% tax brackets pay no tax on qualified dividends. All other taxpayers pay a 15% tax rate on qualified dividends with the exception of those in the highest 39.6% tax bracket. They pay a 20% tax on qualified dividends.

Ordinary dividends are taxed at the taxpayer’s ordinary income tax rate. These rates range from 10% to 39.6%.

Examples of Funds That Make Dividend Distributions

Bond and money-market funds normally make only ordinary dividend distributions. Stock mutual funds, however, can distribute ordinary dividends, qualified dividends or both. Here are five funds that have made dividend distributions in 2016. To get more data on the five mutual funds that pay out dividend distributions, click on their ticker symbol in the table.
Check out the top dividend ETFs at our sister site ETFdb.com.

The Bottom Line

Mutual fund dividend distributions can come from a multitude of sources, making them a bit complicated come tax time. Understanding the difference between ordinary and qualified dividends as well as how they’re taxed is important since it can mean the difference between hundreds of dollars or more in taxes that can be saved.

To learn more about mutual fund distributions, check out our What are Mutual Fund Distributions article.


Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Popular Articles

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.

Why 30 trillion is invested in mutual funds book

Download our free report

Find out why $30 trillon is invested in mutual funds.


Read Next