Question : Tax Shelther a Short Term Mutual Fund account?
Tax Shelter a Short Term Mutual Fund account?I am 72 years old and I want to put down $10,000 to start a Short-Term(2-5 year) account, with divided reinvested to buy more shares. I hear that even though the dividends are reinvested, dividends reinvestment are considered taxable income for that year and I will have to pay at the end of the year. Is this information correct?If so, how else would a be able to direct the dividends so that I be tax sheltered from govn't hands. Would I be able to direct earnings into an IRA, but only $4000 is allowable for IRA, is there other ways to not get taxed on my Mutual Fund divideds and earnings? Annuity? Life Policy? LTC?
- asked by Dee S
All Answers:
Answer #1
You are correct. Dividends are taxed whether theyare reinvested or withdrawn.A municipal bond fundpays dividends that are exempt from Federal taxand MAY be exempt from state tax depending as towhat state you are in.Don't let tax consequencesbe the primary driving force from which investmentyou choose though. I would rather get a 12%return from a taxable account than a 4% returnfrom a non-taxable one.
- answered by Wayne Z
Answer #2
Since you are over the age of 70.5, you are nolonger eligible to contribute to a traditionalIRA. If you have earned income, such as wages orfrom self-employment, you are allowed tocontribute $5,000 per year into a Roth IRA. Youare correct about the treatment of dividends. Even though they are reinvested, the mutual fundwill declare them every year and send you a1099DIV. You will declare those dividends and paya maximum tax of 15%, assuming these are"qualified" dividends which they most likely are. So, you cannot direct your dividends into atraditional IRA, but possibly into a Roth IRA ifyou qualify. If you choose to purchase long-termcare insurance, that is a deductible expense. Ifyou have medical deductions anyway, the purchaseof LTC insurance by using your dividendsessentially gives you tax-free LTC insurancepremiums.If you use the proceeds of yourinvestment to purchase an annuity or lifeinsurance, these are not tax deductible but dohave tax-deferral.
- answered by ninasgramma
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