Question of the Week

Clark recently purchased shares in ABC mutual fund with some funds from the sale of his home. The fund has announced that it will pay Clark a $1,200 dividend and $4,300 in capital gains distribution. All of the following are options that Clark can take with the distributions EXCEPT:

a) Payment of dividends in cash, and reinvestment of capital gains in additional shares
b) Reinvestment of both dividends and capital gains in additional shares
c) Defer the distribution until the following year, to take advantage of a lower tax bracket
d) Payment of dividends and capital gains distributions in cash

Answer: The correct answer is c).

When an investor receives declared dividends and capital gains distributions, they can implement any of the options mentioned above, with the exception of deferring the distribution until the following year. Unfortunately, taxes must be paid in the same year as the dividend and capital gains distribution occurred, unless the account is a tax-deferred account or retirement plan.