Re: 401k and dividend tax

John Qyindi wrote:

> Like if I hold a mutual fund in my 401k that mutual fund pays some
> type of tax on the dividends on the stock it owns.  

Not in the vast majority of cases--a "regulated investment 
company" (the IRC term for what we generally refer to as a 
mutual fund) pays no income tax itself so long as it 
distributes out its dividends in a timely fashion.  That's 
true even if most investors elect to reinvest the dividends. 
  Generally the *investor* pays the tax on those dividends.

However, a 401(k) plan is a tax exempt trust and so pays no 
income tax either.

> Do I as an
> investor in that fund thru the 401k end up paying dividend taxes
> indirectly even though the mutual fund is in a 401k ???

Eventually--but just as you pay taxes on anything in the 
401(k) when you take a distribution.  But it's nothing 
special about dividends.  The 401(k) is a "black box" from a 
tax standpoint--you don't worry about what generated the 
funds available for payment (aside from some special cases 
involving after tax contributions or employer securities), 
just that there are funds paid out and tax to be paid on 
that distribution.

--
Ed Zollars, CPA
Phoenix, Arizona