Mutual Fund Glossary Print Printer-friendly version
 
To go directly to a term and its definition, select it from the list below:

Alternative Minimum Tax (AMT): Alternative minimum tax (AMT) rules ensure that at least a minimum amount of tax is paid by all individuals. For 2001, there is a two-tiered minimum tax: a 26% rate on the first $175,000 of a tax payer's AMT income and a 28% AMT rate in excess of $175,000.

Backup Withholding: Backup withholding is mandatory withholding that may be imposed when rules regarding taxpayer identification numbers (usually a Social Security number) are not met by the individual, or when a notice is issued by the IRS to withhold on payments to that individual. Backup withholding may be claimed as a credit by taxpayers on their federal income tax return.

Capital Gains: Capital gains are realized by a mutual fund portfolio through the sale of securities, such as stocks and bonds, that have gone up in value. Shareholders can also have capital gains when they sell mutual fund shares at a higher price than what they paid.

Capital Gains Distribution: The result from sales by a mutual fund of stocks and securities within the fund that have generated long-term capital gain. Shareholders report the gain in the year in which it is received, regardless of how long the shareholder has owned the shares in the mutual fund.

Coverdell Education Savings Account (formerly called the Education IRA): A tax-favored savings vehicle designed for those saving for a child's post-secondary school education.

Direct Rollover: This is when an eligible qualified retirement plan distribution or IRA distribution is transferred directly from the retirement plan into an individual's IRA or another qualified retirement plan. The individual's employer will not have to withhold 20% for federal income taxes from a direct rollover.

Distributions: These can be capital gains, dividends, and return of capital that are made by a mutual fund to shareholders and reported on IRS Form 1099-DIV. Distributions also include fund withdrawals from annuities and retirement plans, which would be reported on Form 1099-R.

Dividends: Dividends are paid by corporations on stocks held by a mutual fund portfolio. The mutual fund company distributes these dividends to their shareholders who must report the distributions on their income tax return, even if the dividends are automatically reinvested in the fund to buy additional shares.

Employer Plan: An employer plan is a tax-qualified retirement plan an employer establishes to benefit his or her employees. Permissible contributions will depend on the type of plan (such as a defined benefit plan or a profit-sharing plan, including a Section 401(k) plan) and on what the particular employer elects. These plans are highly regulated and subject to significant restrictions under the Internal Revenue Code.

Exchange: This is the sale of shares in one mutual fund to purchase shares in another mutual fund in the same family at market value on that business day. An exchange is considered a sale for tax purposes.

Foreign Tax Credit: If a mutual fund has more than 50% of the value of its assets invested in securities of foreign corporations, the fund may pass the benefit of the foreign tax credit to its shareholders. A mutual fund that distributes a foreign tax credit must notify its shareholders of their share of foreign taxes paid by the fund and the portion of the dividends that represents foreign income.

Individual Retirement Account (IRA): An IRA is a tax-advantaged personal savings plan that lets an individual set aside money for retirement. All or part of the participant's contributions may be tax deductible, depending on the type of IRA chosen and the investor's personal financial circumstances. Distributions from many employer-sponsored retirement plans may be eligible to be rolled into an IRA to continue tax-deferred growth until the funds are needed.

Municipal Bond Funds: These funds invest in bonds issued by states, cities, and other local government agencies. They raise capital for needs such as hospitals, schools, and roads. Income is generally exempt from federal income tax and may also be exempt from state or local taxes, or both, if the investor lives in the state that issued the bonds.

Mutual Fund: A mutual fund is a professionally managed investment company that pools money from shareholders and invests in a variety of securities, including stocks, bonds, and money market instruments. It issues shares to incoming investors at net asset value plus any applicable sales charges, and it redeems shares at net asset value less any redemption fees.

Real Estate Investment Trust (REIT): A REIT is a company that owns and manages many types of income-producing real estate, including office and apartment buildings, shopping malls, and hospitals.

Realized vs. Unrealized Capital Gain (Loss): A capital gain (or loss) is realized once the shareholder redeems or exchanges his or her mutual fund shares. Gains (or losses) are not realized while they are still being held in an account.

Recharacterization: After making your contribution for the year to one type of IRA, you choose to transfer this contribution (plus earnings) to another type of IRA (i. e., traditional to Roth or Roth to traditional).

Redemption: A redemption is the sale of mutual fund shares. The shareholder sells the shares back to the fund at the net asset value of the shares redeemed (less any contingent deferred sales charge, when applicable).

Reinvested Dividends: These are dividends that are reinvested by a mutual fund to buy additional shares. Reinvested dividends are fully taxable (listed on IRS Form 1099-DIV), even though they are not taken as a cash distribution. They become part of your cost basis.

Retirement Plan Withholding: A distribution to an employee from an employer-sponsored retirement plan is generally subject to a mandatory 20% withholding for federal income taxes (unless the distribution is $200 or less). No withholding is necessary if the funds are directly rolled over into an IRA or other qualified retirement plan. Distributions not eligible for rollover are not subject to 20% withholdings. Other rules apply to periodic distributions.

Return of Capital: A distribution that is not out of earnings and profits is a return of the amount, or capital, that was invested in the mutual fund. Returns of capital are not taxed as ordinary dividends, and are sometimes called tax-free dividends or nontaxable distributions. Distributions that are a return of capital reduce your cost basis.

Roth IRA: A special type of IRA under which distributions may be tax-exempt. Individuals may make nondeductible contributions into a Roth IRA if certain income requirements are met. Qualified distributions from a Roth IRA are tax-free.

Short-Term vs. Long-Term Capital Gain (Loss): A capital gain or loss is long term if the investment was owned for more than one year. It is short term if the investment was owned for one year or less.

Simplified Employee Pension (SEP): A simplified employee pension is a written arrangement or program that allows an employer to contribute tax-deductible dollars toward an employee's retirement. A SEP may be established by a corporate or noncorporate employer. From an individual's perspective, a SEP has the administrative simplicity of an IRA, but also allows the employer to make contributions on the employee's behalf in addition to the employer's annual contribution limit.

Uniform Gifts to Minors Act/Uniform Transfers to Minors Act (UGMA/UTMA): A state law that allows gifting to the name and taxpayer identification number of a minor. It provides a tax benefit because some or all of the income produced by the investment is taxed at the rate for the minor's presumably lower income.

Neither Prudential nor its sales professionals render tax or legal advice. Please consult your tax or legal adviser before making any tax-related investment decisions.

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