When a mutual fund distributes capital gains—does the fund pay any taxes or is the total tax passed on to the shareholder only? My wife asked this question and I did not have the answer.
Terry Says: The gains on sales of stocks in mutual funds are distributed to the shareholders, and THEY pay the taxes. Of course, if your shares are held inside a retirement plan such as an IRA or 40l(k), then you don’t get the benefits of capital gains tax rates, because all withdrawals come out as ordinary income. And you don’t pay any taxes on those types of accounts — despite capital gains distributions which are reinvested — until you withdraw money during retirement.