Mutual Funds: Are investments taxed?
 

Are investments to mutual funds taxed at the end of the year, or are withdrawels only taxed?

As an example: If I invested $10,000 this past year in a mutual fund, and did not sell any shares, will I be taxed on that $10,000 investment when I do taxes in the upcoming months?

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.

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.

Yeah, they are certainly taxed every year, and not just on dividends. Mutual funds pass through all capital gains and losses as well as dividend tax. Anytime you own a mutual fund you will most certainly get a 1099 every year even if you did not sell off any of your portion.

As others have already said, mutual funds may make up to 3 annual distributions - long term capital gains, short term capital gains, and dividends. Each receives a different tax treatment - for example short term gains are taxed at your marginal rate (which is the highest of all the rates assuming you have any income) while long terms gains get taxed at 15% (or 5% if you meet certain income requirements).

For funds in a retirement account (IRA or 401K), you don't have to worry - the investment grows tax free. For a normal account, you have to pay taxes - therefore, when choosing an mutual fund, you want ones that have a low turnover which (usually) corresponds to low distributions and have a low tax burden. Tax consequences are often overlooked when choosing funds, but they can have a significant effect on the long term performance.