I have seen the advice of not to invest in an index / mutual fund at the end of the year. The reason seems to be that this is when these funds pay out dividends which is taxable.


  • Capital gain is taxable anyway, no matter when I invest. So I should still make my automatic investment during end-of-year, correct? The only reason a person shouldn't start investing at year-end is because he will suffer the tax bill without the benefit of having invested throughout the year prior.

  • Even if he start investing at year end, can he still soften the blow by re-investing the dividend instead of cashing out? That way, he does not have to pay short-term capital gain tax on the cashed-out dividend.

  • If this "softening" works, how much does it help? How bad is it to start investing at the end of the year?

  • I marked this as duplicate, since the answer in the other question (and the comments to it) cover the issue you're referring to. If you have questions after reading that - please ask again as a more specific query. – littleadv Dec 24 '14 at 7:55
  • @littleadv Thanks for the link -- it answers why investing at end of year is bad because of tax. It also seems that if I re-invest my dividend, I don't get dividends in hand and don't have to pay tax on it immediately? Bottom line is, should I cancel my automatic monthly investment during the end of year? – Heisenberg Dec 24 '14 at 8:09
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    If you're doing monthly investments - then its not significant enough to break the habit. Leave it as is. In any case, by know most of the capital gains/dividends have been distributed, or at least announced, so you can know exactly what you're getting into. – littleadv Dec 24 '14 at 8:19
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    Whether you reinvest your distribution or take it as cash, that amount is taxable income to you for the year in which you receive the distribution. You don't "pay tax on it immediately" the way taxes are withheld from wages, but you do need to take it into account if you make quarterly payments of estimated tax, and you do need to report the distribution amount on your income tax return and pay tax on it then. "But I get a refund each year" you say? Well, the refund will be smaller by the amount of income tax owed on the distribution. – Dilip Sarwate Dec 24 '14 at 14:23
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    As I see it, if you are invested in a tax-sheltered account, it makes no difference – karancan Dec 24 '14 at 21:50