Advice about bonds in a taxable account

[moda0306]

What keeps them from not paying distributions if that's all it takes to avoid the taxpayer having to realize taxable income... or does it not take a distribution.

I honestly have almost nil experience or history with tax-planning within actual funds or how the tax laws around these work.

[dualstow]

What keeps them from not paying distributions if that's all it takes to avoid the taxpayer having to realize taxable income... or does it not take a distribution.

I honestly have almost nil experience or history with tax-planning within actual funds or how the tax laws around these work.

I haven't read the PRPFX prospectus, but I would guess that there are legal or practical reasons.
1) They do have to sell components once in a while.
2) LT Treasuries pay interest.
3) I know that real estate trusts have a legal obligation to pay out something like 95% in dividends.
Put those three together, and I'm not surprised that there is *some* distribution that needs to be made, even for something so different from a REIT.

Vanguard's smallcap index fund pays dividends and has capital gains -- the latter coming from the occasional change in components and adjusting weightings, I suppose. I'm sure investors in smallcap would like to have zero distributions, like holders of Apple stock have, but ...
Just a guess, though. I'm sure someone here knows.

[dualstow]

Well, I just found this in the June 2010 PRPFX Prospectus:

Dividends and Tax Planning
Each Portfolio distributes its net investment income and net capital gains, if any, to its shareholders as dividends only once a year and intends to continue to satisfy the distribution requirements necessary to qualify for treatment as a RIC. Under the Code, a Portfolio is required to pay as dividends for each taxable year at least 90% of its investment company taxable income (which generally consists of net investment income, net short-term gain, and net gains and losses from foreign currency transactions) to qualify for such treatment.

earlier in the same document:

Tax status. Each Portfolio intends to pay dividends each taxable year to enable it to continue to satisfy the distribution requirements necessary to qualify for treatment as a regulated investment company under Subchapter M of chapter 1 of the Internal Revenue Code of 1986, as amended (“Code”?) (“RIC”?). If a Portfolio were to distribute to its shareholders less than the minimum amount required for any year, which the Fund considers unlikely, the Portfolio would become subject to federal income tax for that year on all of its taxable income and recognized gains, even those distributed to its shareholders.

[Storm]

Not sure what you mean. It pays a dividend every month!

SEC 30 Day Yield 3.13%
Distribution Yield 3.49%
12 Month Yield 3.16%

Even if they did reinvest the dividends somehow, the fund would still owe taxes. And they'd just pass those taxes on to their investors.

I see.  I'm not sure how you found the dividend payments, but I see how that would increase your taxable (short-term) income significantly.

Question (apologize for the noobishness):  Why couldn't a fund maintain a low tax basis by capturing long-term capital gains instead of short-term capital gains just like an individual investor?  Perhaps having a bond ladder of 1-30 year treasuries would preclude this, as you might be receiving coupon payments every 6 months, but I'm curious if mutual funds and ETFs have the same or different tax rules than individual investors.

[Gumby]

I'm not sure how you found the dividend payments, but I see how that would increase your taxable (short-term) income significantly.

The dividends are listed on the right side of the ETF's official overview page under "Yield":

http://www.invescopowershares.com/produ ... ticker=PLW

And if you look at a historical chart of the ETF on your favorite finance website, you'll notice little dividend payments each month.

Question (apologize for the noobishness):  Why couldn't a fund maintain a low tax basis by capturing long-term capital gains instead of short-term capital gains just like an individual investor?  Perhaps having a bond ladder of 1-30 year treasuries would preclude this, as you might be receiving coupon payments every 6 months, but I'm curious if mutual funds and ETFs have the same or different tax rules than individual investors.

See: http://www.smartmoney.com/invest/strate ... nds-17616/?