Mutual Funds/capital gains and dividends in an IRA
Hello, I have a Traditional IRA and 2 of the mutual funds in this IRA recently paid out capital gains and dividends. Since I'm 60 years old and all of the major indices in the stock market have reached all time highs, I thought it would be a good time take these profits in cash, so I had them deposited into an IRA cash fund. My intentions are to use this cash to put back into the market in case of a correction.
Well, I'm just a novice at investing and don't fully understand what happened. The capital gains and dividends came to about $7,000. The NAV dropped on both funds and the $7,000 went into the Cash Fund but the total dollar amount of my IRA is the same as it was before the distributions.
Thanks for any information you can provide.
Hi. Whenever there are distributions that occur from stocks or mutual funds, the share price is reduced by this same amount accordingly since the overall value of the holding has not changed, it has simply redirected some of the value to you in the form of cash. For example, if company A has a value of $1M and they have an additional $1M in cash, the total value of the company is $2M. If they take $100,000 of this cash and distribute it out to shareholders, the company on paper is now worth $1.9M. Therefore, they need to adjust the share price to reflect this new value. From your vantage point as an investor, the value of your total investment is the same except that now a portion of your investment value is based on the value of the company and the other portion is the value of the cash received. I hope this helps clarify.