SIE practice questioneasyMutual Funds — Automatic Reinvestment
When a mutual fund investor elects automatic reinvestment of dividends and capital gains distributions:
- AThe distributions are used to purchase additional fund shares and are still taxable in the year received✓ Correct answer
- BThe distributions are not subject to taxes because they are reinvested
- CThe fund waives all management fees on reinvested shares
- DThe investor receives a reduced sales charge on reinvested amounts
Explanation
Why A — The distributions are used to purchase additional fund shares and are still taxable in the year received
Even though distributions are automatically reinvested in additional shares, they remain TAXABLE in the year received. This is a common misconception tested on the SIE. Reinvestment is simply a convenience feature — it does not change the tax treatment. Most funds allow reinvestment at NAV without a sales charge, but the distributions themselves are still taxable income.
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