Q&A Andrew Leckey

October 26, 2008

Q: Do all mutual funds automatically reinvest their dividends? Are there exceptions?

- F.V., via the Internet

A: The choice is up to you.

You are given the option of having dividends and capital gains distributions either sent to you or reinvested in the fund. Many investors select reinvestment because it is a way to build their investment.

But no matter how the dividends are received, it remains important that you keep track of them for tax purposes.

"When you reinvest the dividends in the fund, you're using that money to buy more shares of the fund," said Mark Salzinger, publisher and editor of The No-Load Fund Investor in Brentwood, Tenn. "Your fund will send you statements telling you how much was paid in dividends and, if you reinvest, also how many new shares were purchased."

You must pay taxes on reinvested dividends just as you would on those received in cash.

That reinvestment represents an additional purchase that increases the cost basis of your holdings in the mutual fund, and that makes it important to retain all records of reinvestment.

E-mail Andrew Leckey at yourmoney@tribune.com.

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