how to take advantage of down market?

[jpg7n16]

so if i buy 10k worth of target funds (not ROTH) and i just let it sit there (never take anything out) for 10 years, it has no tax implications for those 10 years? only if i take money out back into my bank account?

You would still be responsible for the taxes on any dividends, interest payments, or capital gain distributions from the fund during those 10 years. Even if you reinvest it. It is considered to have paid out income (which is taxable to you upon receipt) and then you are considered to have received the income and chosen to invest it back into the mutual fund.

You just wouldn't be taxed on the unrealized gain during those 10 years.

[rigz]

oh can you re-explain the difference between dividends, interest payments, capital gain distributions and unrealized gain? or give me a link that discusses the differences. i think thats a big part of my problem - dont quite understand all the terms.
thanks.

also would my taxes be due at the end of each year or at the end of the 10 year period?

[rigz]

sorry for so many questions but i am learning a lot and do appreciate it.

[jpg7n16]

oh can you re-explain the difference between dividends, interest payments, capital gain distributions and unrealized gain? or give me a link that discusses the differences. i think thats a big part of my problem - dont quite understand all the terms.
thanks.

Sure thing

The basic premise is that a mutual fund pools a lot of investors' money together and buys a lot of securities with that money. The most common investments held in mutual funds are stocks, bonds, cash equivalents (actual cash, money markets, CDs, commercial paper, etc.) and occasionally some commodities/precious metals.

Dividends: Dividends are a distribution from a stock of current/previous earnings. So when the underlying stock investments make dividend distributions to the fund, the fund aggregates those dividends together, calculates the dividends per share and distributes them onto the mutual fund investors. Dividends are taxable as earned.
Ordinary Dividends Definition

Interest: Bonds make interest payments over the life of the debt, as the cost of borrowing money. When a mutual fund owns bond investments, it will receive interest payments from those underlying bond investments. Then, similar to the dividends, the fund will combine those payments together and send out interest payments to the fund shareholders. Interest is also taxable as earned.
Interest Definition

Capital gain distribution: Just like a regular person can have capital gains when they sell an investment at a gain, mutual funds have capital gains too. So if the fund bought stock 10 years ago, which has gone up in value, and the fund decides to sell its investment to buy a different stock, a taxable event has occurred. This gain is passed onto the fund shareholders. Often times, the fund will make a capital gain distribution to give the shareholders some capital to pay the taxes on that gain. Just as the fund had a taxable event upon sale, the investor has a taxable event - and must claim their share of income during the year the sale happened. (note: the funds don't always make a distribution, sometimes leaving the investor with a form of phantom income, cause you're responsible for paying taxes on the gain whether the fund gives you the money to pay it or not)
Capital Gains Distribution Definition

-another fyi: one major difference between mutual funds and ETFs, is that ETFs do not pass the gain from a sale onto the investor. The gain is kept with the fund, so the ETF investor does not incur a taxable event when fund investments are sold. ETFs still make dividend and interest payments to shareholders, but get to bypass the craziness of capital gains. This makes ETFs more tax efficient than mutual funds.

also would my taxes be due at the end of each year or at the end of the 10 year period?

Income tax is due each year, so you include any income earned between Jan 1st and Dec 31st and pay tax on that each year as earned. All you have to do is look at what day you received it, and include it on that year's tax filing.

So unless it's held in a tax deferred account (like an IRA, 401k, etc.), if you receive a dividend from a mutual fund anytime between 1/1/2012 and 12/31/2012, it must be included on your income tax for the year 2012 (which you must file by April 2013).