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Originally Posted by The_Jazz
They are only taxed on withdrawal. The money is pre-taxed as income (generally speaking). I've also been taxed on growth in some occassions, but I'm not enough of a tax expert to know why or why not.
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You get taxed if the mutual fund distributes capital gains. Many funds have sizable capital gains distributions, and you want to NOT buy them around the time of the distribution, or you will get socked with the tax bill. It's called "buying a dividend" and should generally be avoided. On the other hand, if you're a long term investor in the fund, you just generally grin and bear it.