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It's the end of 2015, and most mutual funds are paying out their annual dividends, which I have enrolled in DRIPs (dividend reinvestment programs). Since a "DRIP" transaction is similar to purchasing shares of the fund, would a DRIP-purchase date be subject to a redemption fee restriction?

Often, mutual funds charge a redemption fee (typically if you sell a holding < 90 days after purchasing) to discourage short-term holdings of their fund (for good reasons of course!).

However, come 2016, I would like to rebalance my portfolio and much of the recent DRIP purchases that just kicked in make me wonder if they're subject to redemption fee penalties.

The only thing I could find about this in a Google search was an SEC document on Mutual Fund Redemption fees discussing Investor Initiated Transactions (page 26) from the year ~2005 stating (bold emphasis mine):

We are considering whether the rule should require that any redemption fee charged by a fund be limited to transactions initiated by investors. Under such an approach, redemption fees would not be assessed with respect to (i) shares purchased with reinvested dividends or other distributions [...]

However, I can't determine if this discussion-style document has any sort of actual legal bearing today. Can anyone comment or help me understand, say, if a mutual fund that just paid me $100 in dividends on December 30th, 2015, and has a 90-day redemption-fee of 2%, would exempt the fee for DRIP purchases if I turned around and sold my holdings in January of 2016 (less than 90 days)? Is it a fund-by-fund basis or is there a specific law restriction now in place (vis-a-vis the quoted document above)?

Thanks in advance for any tips and pointers!

  • Unless by rebalancing you mean sell one fund entirely and shift to another, this may be moot. Unless you specifically direct otherwise, redemptions will be FIFO starting with your oldest holdings which are probably old enough to avoid the charge. However, you are subject to the wash sale rule if you sell at a loss and recently made any purchase including a DRIP; that one bit me one time. Your wash loss is small and is only deferred, not eliminated, but the paperwork is still a nuisance. – dave_thompson_085 Dec 31 '15 at 15:00
  • Yes... time is money as well =) Good tip, thanks and I'll consider it - I am indeed selling (rebalancing) in 2016 so some of these minor transactions I suppose would incur "losses" that would need to be reported - but this is all within a Roth IRA for the most part, so I don't think that it even matters. – Mike Jan 1 '16 at 22:08
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    Yes, wash sale applies only for a taxable account, not IRA nor 401k HSA etc; I forgot to note that limitation. Also only for taxable holdings, one thing that often confuses is mutual funds usually report basis per share (and thus gain or loss) using average cost -- although you can opt for specific-lot -- but long-term/short-term holding period still normally uses lot-by-lot dates FIFO. – dave_thompson_085 Jan 2 '16 at 2:58
  • That's probably yet even more information than I ever expected to need to know, thanks @dave_thompson_085. – Mike Jan 3 '16 at 4:13
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Money earned from a mutual fund that is automatically reinvested in not usually subject to redemption fees. If you bought a fund with a backend load (deferred service charge, redemption fee, service charge, etc) then the reinvested income can be used to buy more units but the amount of additional units bought is tracked separately by the fund company. The tracking process is internal to the company. If you call them then they will be able to tell you what portion is "free" and what portion is subject to the redemption schedule. Unless there is a really good reason, the regulators will not allow reinvested income to become subject to a redemption charge.

On a further note, the 2% 90 day charge is really designed to discourage people from trying to actively time the fund and buying/selling it frequently. It is usually only applied when you've done more than three or four transactions within a certain time period, such as 30 or 45 days. It's more of a penalty that is rarely used. Call your fund company for details.

  • Thanks for the tip. I'm a passive investor and only make a few large trades annually: contributions and rebalancing. So it looks like I'll probably be just fine regarding rebalancing soon in 2016 without worrying about recent DRIP transactions being penalized as redemption-fees. – Mike Jan 1 '16 at 22:11

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