How Do You Earn Money

Once your money is in a fund, it can provide you with earnings in three ways.

Dividends
If the fund receives dividends from stocks, interest from bonds, or other investment income, it may distribute these earnings to shareholders as a dividend according to the terms outlined in its prospectus. Depending on the fund, these distributions may occur monthly, quarterly or annually. You can choose to have the fund automatically reinvest the distribution in more fund shares or you can have the money sent directly to you.
Capital gain distributions
Every time the fund manager sells securities at a profit, the fund earns capital gains. Funds are required to distribute these gains to the shareholders once a year. You can choose to have the fund automatically reinvest the distribution in more fund shares or you can have the money sent directly to you.
Selling your shares
The value of a fund share may appreciate or decline in value. When the total value of the securities owned by the fund rises, the value of your fund shares rises with it. If you sell the shares at a price higher than what you paid, you have realized a capital gain.

When you buy and hold mutual funds in a taxable account, you must pay income tax each year on any dividends and capital gains distributions that you receive. If you own shares of a mutual fund that go up in value over time, you won't owe tax on their increased value until you actually sell your shares and make a profit. If you sell your shares at a loss, you may be able to offset losses against any gains or they may be carried forward to subsequent years.

For more detailed information about taxes, consult your tax advisor.

AARP Financial Inc. does not provide tax advice. Please consult a tax advisor for information pertaining to your particular situation.

The information and content provided herein is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a specific recommendation, or legal, tax or investment advice, or a legal opinion. Individuals should contact their own professional tax or investment advisors or other professionals to help answer questions about specific situations or needs prior to taking any action plan based on this information.

The Financial Advisors are investment adviser representatives of AARP Financial Inc., an investment adviser.

While AARP endorses the services provided by AARP Financial Inc., AARP does not offer financial products or services itself and cannot recommend that you or any specific individual should purchase any particular product or service. AARP Financial Inc. is an investment adviser and a subsidiary of AARP.