Section IV - Lesson 3
Taking Money From Your Regular Investment Account
We’ve been talking so far about how your purchases are handled. What if you need to make a withdrawal? Let’s say your car just died and you need to make a down payment on a replacement. How fast can you get some funds from your account and how do you go about this? Let’s say you need $1000.
You simply pick up the phone and call the client services 800 number for your fund. Assuming that you arranged for telephone withdrawal privileges when you set up your account, you just provide certain security information and then request a check for $1000. Providing that you call before 4:00 pm Eastern Time, enough full and fractional shares are sold that day to generate a check for $1000 which will be mailed or wired to you on the following business day. That’s all there is to it.
As with your purchases, there is no charge or commission to sell shares of this fund. Depending upon the average cost of all the shares of this fund that you have purchased over the years, you will incur a capital gain or loss that you will need to report with your tax return at the end of the year. The fund will provide you with necessary data for this task. Be aware that even if you generate a sizeable gain from this sale, (say $300), your taxes at the capital gains rate will usually be less than they would be on interest earned, or ordinary income.
Suppose, instead, that you need to arrange to get a regular monthly check from your mutual fund account. Let’s say that your child is in college now and you’ll need an extra $1200 per month to supplement the family budget for a while. You simply call and state that you want to systematically withdraw this regular amount on some specific day each month until further notice.
Along the way, you can call to increase or decrease this amount, or to stop it entirely. Or you can call for extra amounts, as needed. As you can see, you have total flexibility to manage your flow of money into and out of your mutual fund account, and this, along with miniscule fees, is what makes this fund an ideal investment for your regular money account. Not only can you automatically invest, but you can also get your money when you need it.
Whether or not you had withdrawals during the course of a given year, you’ll need to address your regular money account on your annual tax return. You’ll always have dividends and capitals gains distributions to account for, even though these distributions are being reinvested back into your fund. The IRS makes you treat these as if you actually received them in cash and then reinvested the cash. These items are considered income and must be reported on your form as if you received them.
The good news is that your taxes on the dividends and capital gains distributions from your regular money account will not be anywhere near as onerous as they would be if you were receiving interest on this same amount of money. Dividend yields from common stocks are generally miniscule by comparison to the interest rates on bonds or certificates of deposit. And capital gains distributions from market index funds are nearly non-existent. This is because portfolio turnover in these funds is also nearly non-existent. Even in later years, when you’ve accumulated quite a bit of wealth, your taxes from this source should not pose much of a problem.
If you had one or more withdrawals (sales) from your account, you’ll also have to account for any related capital gains or losses. On Schedule D of Form 1040 you enter information provided by your fund company as to proceeds of your sales, cost basis of the shares sold, and whether the profits or losses should be considered to be short or long term in nature. It’s actually a lot simpler than it sounds because the fund company provides you with everything you need to know to do your taxes.
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