In a ROTH, stock or mutual fund dividends do nothing to cost basis. Anything above your principal is simply considered growth and taxed as income if withdrawn early. If not withdrawn early, then obviously no tax. But the principal basis is unchanged. Only ROC effects basis. It's called return of "capital" for a reason. And if you liquidate and withdraw principal from the ROTH, the principal will be reduced by the amount of capital returned.

Outside a ROTH, only stock dividends (meaning dividends paid in the form of new stock shares), ADD's to the cost basis. (Where as return of capital LOWERS your cost basis). But cash dividends do nothing because you get a 1099-DIV every year on cash dividends even if you did dividend reinvestment. (except in a traditional IRA of course)

I thought you had your 7? This basic stuff, man.

quote:
How is this different than any other share of stock?

Stocks and mutual funds can almost always be sold back to the company at their offering price. They are priced linearly with NAV.

CEF's share price and NAV are not linear. You typically buy them at a premium or discount to NAV. And most of all, the CEF managers don't usually offer a daily redemption program. They don't list a daily OTC offering price. You either have to find an independent buyer or hope the CEF has the capital to buy back shares at some point and at a fair offering price. Which rarely happens. They usually do a quarterly or semi-annual redemption around 10% lower than NAV.

quote:
How is this different than holding any other asset in a Roth?

It's not. I was simply being informative to the folks here who don't know how ROTH's work.

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Posted by SquatchDawg

Cohutta Wilderness

Member since Sep 2012

14298 posts

Posted on 8/8/16 at 7:38 pm to BeefDawg

The CEF is just a weird vehicle - especially at distribution levels this high. I reviewed some of their docs and their distributions outpaced the return on their underlying assets pretty significantly....so they have to be selling assets (return of capital) to fund the distributions - but you say they also use new entrants $$ to fund these too?

What's the purpose behind this type of vehicle? Sounds like they're built for stable tax advantaged income streams (return of capital?) for folks that don't mind the underlying value being slowly eroded (i.e. 69 yr old retiree).

Glad I didn't run out a buy a bunch of shares!