Distributions

Hi;

I have almost 1800 shares in Ameriprise New Dimensions Fund(INNDX). In
December 05, they had distributions of about 5.00 a share. So I was
asked if I wanted to roll over the 9,000 or If I wanted to sell the
1800 shares before the distribution hit. That way I could take a loss
for tax purposes. I thought I would rather pay taxes on the 9k than not
have the 9k at all. I noticed the day after the distributions were sent
out, the fund dropped 5.00 a share(the same as the distributions). Is
this common after distributions for the price to drop so much?

Thanks

Re: Distributions

"komobu" <> wrote in message
news:
> Hi;
>
> I have almost 1800 shares in Ameriprise New Dimensions Fund(INNDX). In
> December 05, they had distributions of about 5.00 a share. So I was
> asked if I wanted to roll over the 9,000 or If I wanted to sell the
> 1800 shares before the distribution hit. That way I could take a loss
> for tax purposes. I thought I would rather pay taxes on the 9k than not
> have the 9k at all. I noticed the day after the distributions were sent
> out, the fund dropped 5.00 a share(the same as the distributions). Is
> this common after distributions for the price to drop so much?
>
> Thanks

Yes, it is. The distribution is paid from the fund which causes the NAV to
drop by exactly the amount of the distribution. It's arithmetic.

-herb

>

Re: Distributions

Herb wrote:
> Yes, it is. The distribution is paid from the fund which causes the NAV to
> drop by exactly the amount of the distribution. It's arithmetic.

Is it the exact amount, or it is approximately the distribution amount?
(ignoring the next days market movements. Pretend that the distribution
occurred on a day when the market was closed, yet NAV was
recalculated). I thought I read that when stocks pay dividends, the
stock price will drop roughly the dividend amount, but slightly off,
because of tax implications.

If it's the exact amount, then there's an arbitrage and everyone should
be "buying the dividend". Here's an example where the fund price is at
$100, and there is about to be a $5 dividend. Your cost basis is $100.

If you sell before distribution, then you have $100, no taxes paid.

If you sell after distribution, then you have $95 from selling the fund
and $5 in dividends. You pay $5 x 0.15 = $0.75 of dividend tax. But you
also get $5 x 0.25 = $1.25 of capital gains deduction. You have $100.50
in your pocket after all taxes.

Re: Distributions

"Bucky" <> wrote in message
news:
> Herb wrote:
> > Yes, it is. The distribution is paid from the fund which causes the NAV
to
> > drop by exactly the amount of the distribution. It's arithmetic.
>
> Is it the exact amount, or it is approximately the distribution amount?
> (ignoring the next days market movements. Pretend that the distribution
> occurred on a day when the market was closed, yet NAV was
> recalculated). I thought I read that when stocks pay dividends, the
> stock price will drop roughly the dividend amount, but slightly off,
> because of tax implications.
>
> If it's the exact amount, then there's an arbitrage and everyone should
> be "buying the dividend". Here's an example where the fund price is at
> $100, and there is about to be a $5 dividend. Your cost basis is $100.
>
> If you sell before distribution, then you have $100, no taxes paid.
>
> If you sell after distribution, then you have $95 from selling the fund
> and $5 in dividends. You pay $5 x 0.15 = $0.75 of dividend tax. But you
> also get $5 x 0.25 = $1.25 of capital gains deduction. You have $100.50
> in your pocket after all taxes.

I don't quite follow your logic. It is nothing like a stock dividend. The
decrease in NAV is *exactly* the same as the amount of the distribution. In
your expample you would still have $100 ($95 in mutual fund shares and $5 in
cash which you may or may not reinvest). If you did, indeed sell you would
have a $5 capital loss and $5 in dividend income. Which would be more
advantageous would, I suppose, depend on your tax bracket.

Mutual fund distributions, per se, have no effect on the balance in your
account.

-herb
>

Re: Distributions

NAV is the amount of assets the fund has, divided by shares
outstanding.

The amount of assets the fund has did not change as a result of the
distribution.
the shares outstanding increase. This decreases the share price. It's
arithmatic.

Re: Distributions

Bucky wrote:
>
> Herb wrote:
> > Yes, it is. The distribution is paid from the fund which causes the
> > NAV to drop by exactly the amount of the distribution. It's
> > arithmetic.
>
> [...]
> If it's the exact amount, then there's an arbitrage and everyone should
> be "buying the dividend". Here's an example where the fund price is at
> $100, and there is about to be a $5 dividend. Your cost basis is $100.
>
> If you sell before distribution, then you have $100, no taxes paid.
>
> If you sell after distribution, then you have $95 from selling the fund
> and $5 in dividends. You pay $5 x 0.15 = $0.75 of dividend tax. But you
> also get $5 x 0.25 = $1.25 of capital gains deduction. You have $100.50
> in your pocket after all taxes.

The IRS has dealt with this. If you "buy the dividend" and then take a
loss (within six months of purchase) due to a dividend distribution,
then the loss is treated as a long term loss, not a short term loss, and
you pocket $5 x 0.15 = $0.75 of capital gains deduction. You have $100
in your pocket after all taxes.


(Describing the same example, and explaining that it won't work.)


(IRS Pub 564 page saying the same thing.)

--
Mark Freeland