Apr 29

Question by samhandwich22: Regarding investing in a roth IRA- what is a dividend? what is a capital gains distribution?
I opened a roth IRA via sharebuileder. I am trying to invest in a mutual fund and as a 23 year old, I am very unexperienced in this area (they dont teach you these things in college!).
It is asking me if i wanted to reinvest dividends and also asking me if i want to reinvest capital gains distributions? I dont know what either of these mean. Whats the best way for me to get the most money out of my roth IRA?

Best answer:

Answer by William
Yes, you want to reinvestment them. Dividend and capital gains distributions are paid by the specific mutual fund. Reinvesting them means that they are automatically used to purchase additional fund shares – sort of like compounding of interest on a savings account.

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one comment so far...

  • Paul Said on April 29th, 2013 at 4:03 am:

    “It is asking me if i wanted to reinvest dividends and also asking me if i want to reinvest capital gains distributions? I dont know what either of these mean.”

    Dividends are paid by many stocks held inside the mutual fund you own. When they are received by the fund company from all the individual companies that pay them, the fund company in turn will pay them to you and all the other holders of shares of the fund. You can elect to take them as cash, in which case they will be deposited to your Roth as a cash balance, or you can elect to have them re-invested in which case they will use the money to buy you more shares of the fund.

    Capital Gains are realized by the fund when the manager sells a particular stock the fund holds for more than they paid for it. These are usually paid out by the fund once a year, typically in December. Again, you can elect to have this money re-invested or receive it as cash.

    Some mutual funds also hold bonds in their portfolio as well as stocks. (known as “blended funds”) Bonds typically pay regular interest payments. If you hold a blended fund, you are eligible to receive the interest payments from the bonds they hold also and can elect to have them re-invested or taken as cash, just like the previous two.

    “Whats the best way for me to get the most money out of my roth IRA?”

    In the case of the mutual funds you hold inside the Roth, you are generally better off re-investing dividends, capital gains and interest as this allows you to regularly gain more shares without adding more money and as the funds price rises over time, your gains are compounded that much more quickly.

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