EPS 23 - Dividend Dates Demystified: Ex-Date vs Record Date Made Simple

 In this episode of the Pink Money Podcast, Jerry unpacks the confusing world of “X-date.” While the media ties the term to debt ceiling debates, in the investing world it means something very different. Jerry explains the record date, declaration date, and ex-dividend date for mutual funds—what they mean for payouts, taxes, and your portfolio. Using simple examples, he breaks down how dividends and capital gains affect share prices, when it makes sense to buy, and why chasing distributions isn’t always the best move. Plus, he touches on tax considerations and smart planning tips so you can avoid costly mistakes and invest with confidence. 

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Transcript

UNKNOWN: 0:01

Thank you.

SPEAKER_00: 0:56

Hello, and this is Jerry. Welcome to the Pink Money Podcast, where we talk about all things related to money from a gay perspective. And you know, what I've been hearing lately on the radio is this whole discussion, of course, about the debt ceiling. And they keep talking about, of course, you know, if the government doesn't pay their bills as of the, or increase the debt ceiling to pay their bills as of the X date, which I believe they've pushed out to June 5th. And Anyway, if they don't pay their bills and increase the debt ceiling by the X date, then it's just going to create a lot of havoc and chaos out there. So when I see that, and I've seen it... written like the letter X and then hyphen date or just X and by itself. But anyway, the X date, I guess that just means for them the drop dead date. But when I hear X date, what I think is, especially as it relates to mutual funds, is the date that a mutual fund will trade without the dividend payout. So what does that mean? Is that a good thing? Should I care? Well, I guess what you really should at least be aware of what it means. So if you're owner of a mutual fund shares as of the record date, which is typically towards the end of the year, then all shareholders as of the record date then will receive the distribution payout And the shares will trade for a lower share price on the X date. So what that means is let's just say for example purposes that the... fund is going to pay out$1.50 in dividends and capital gains. And let's say that shares are trading for$10, just for easy math. So if you buy shares or sell shares prior to the X date, then you're going to sell and buy at$10. So on the X date, then the share price is going to drop by the amount of the distribution. So Instead of trading at$10, it's now going to trade at$8.50. So does that mean your portfolio is worth less? No. So what it really means, especially if you reinvest the dividends and capital gains, is that you'll end up with more shares. And even though the fund is trading at a lower share price, it's a wash. So your account will essentially remain the same. Now, if you take that distribution payout in cash, then, of course, you own fewer shares, the share price has dropped, and yes, then your balance will be lower. And that's excluding any up-and-down movement that the market makes on the fund. So it's a taxable event to you because... Mutual funds, now they buy and sell all throughout the year, and they receive dividends all throughout the year from the stocks that they own. So who knows what it's going to be? Who knows what the portfolio managers decide to do? But There may or may not even be a distribution, but most likely there is because they hold lots and lots of different companies. And again, they trade a lot throughout the year. So what that means to you is because this is a mutual fund, then you receive your proportionate share. So on a per share basis, if the distribution is a buck 50, you're gonna get a distribution of buck 50 per share. So if I decide to take my cash and run, Totally fine. You can do that. It doesn't mean you're not going to pay taxes on it because, again, you were in the fund as of the record date, and then you received that distribution payout on the X date. Now, if I were to be an investor who's buying shares, and I was buying towards the end of the year, and I wanted to receive the dividend for whatever reason, then you need to be in there on the X date. not the X date, the record date, pardon me. So would I want to? No, I wouldn't want to because, uh, number one, it's a taxable event to me. And number two is the share price is going to drop and you always want to buy low and sell high. So you want to buy your mutual fund shares post the payout. So buy on the X date or after mutual funds, they will typically know what the distribution is going to be, you know, well ahead of time. Um, Usually probably like 30 days at least, you know, ahead of time, maybe even towards the end of, you know, November, they will typically know what the distribution is going to be. It's not set in stone, but you have a pretty good idea what it's going to be. And a lot of people want to know ahead of time so they can, you know, plan and do their taxes accordingly. Now, they have a declaration date, and let's just say, for example, that it's mid-December, December 15th is the declaration date. That's when they will set this distribution in stone, and you'll know what the total payout is going to be, and it'll be broke down into part dividends and part capital gains because, again, you want to know that because you will be paying that at different rates. So the capital gains are paid at capital gain rates. dividends are paid or taxed as ordinary income. Now that's just at the fund level. So the fund is mandated by law to pay out this distribution to you and they pay out, it's over 98%. So essentially everything is going to be paid out. Now this is, excluding your own trading that you do, because if you've bought and sold shares throughout the year and you've made a profit, then that profit is also taxed at capital gain rates. If you've held it for a year and a day, long-term capital gain rates, less than that, then you just, again, get taxed as ordinary income. So capital gain rates typically bounce around a lot. They are always monkeying with it. I don't know why, but Right now, according to the IRS, this is 2023, you will have a net capital gain of zero if your taxable income is less than or equal to$41,675 for single or married filing separately,$83,350 for married filing jointly or qualifying surviving spouse, or$55,800 for head of household. So... These rates, like I said, do change. They've usually been 15% for the most part for a very, very long time. There are some differences that the IRS makes in terms of a higher capital gain rate. It looks like a taxable part of the gain from selling Section 1202 qualified small business stock is taxed at a maximum of 28%. net capital gains from selling collectibles such as coin or art are taxed at a maximum 28%. And the portion of any unrecaptured section 1250 gain from selling section 1250 real estate property is taxed at a maximum 25% rate. So if that doesn't apply to you, don't worry about it. And if this is in your IRA, don't worry about it. Because you can trade left and right inside of your IRA. All those distributions that occur don't really matter because eventually when you take your distributions and you're over 59 and a half, and if it's in your regular IRA, then that's when the taxes come due. If it's in your Roth IRA, as long as you've been there at least five years and you're over 59 and a half, then everything is going to come out completely tax-free. So we're really only talking about your taxable account. And I have seen, however, where people for whatever reason decide I want to receive the dividend and I want to see that I want to receive that distribution hey that's free money and I'm like well no it's not free because you're going to pay taxes on it number one and it really doesn't help you right because again the share price is going to drop after that and you'd want to buy low and again sell high so you want to buy these shares at a lower tax rate so at a lower rate nav net asset value lower price per share now if you were calling the mutual fund and you were placing your order with a representative they should make you aware of hey you know what there's a distribution coming out um are you aware of that and do you know what that means just so that you're like oh um yeah i forgot about that well when's the x date that's the 27th of december oh okay i'll just wait till then okay perfect now That's what I think a normal person would do, but I've seen all kinds of crazy stuff. I've seen people liquidate their entire portfolios, and then they will buy in after the distribution. Just to avoid that taxable payout when you just created a whole taxable event for yourself doesn't make sense to me. But I guess if your portfolio is in the negative, that might make sense. But if you've had any kind of increases, then that certainly wouldn't make sense, not to me. But hey, to each their own. So you just want to be aware of what those dates are. They're usually published in the prospectus. And again, the fund companies will know typically well ahead of time. what those dates are going to be. Again, the declaration date is just when the company says, hey, this is what the distribution is going to be. The record date, as long as you're in the fund, as of that record date, all shareholders as of that date will go on record and will receive the distribution payout. And then the X date, EX hyphen date, that is the date that the distribution will occur. You'll receive that distribution. Again, it will get reinvested for you typically. And then the share price And again, excluding up and down, any up and down movement of the share price based on the market movement. So I think it's good just to have a heads up about that so that you're aware. Does it really matter, again, in the grand scheme of things? No, because if you're investing for the long term, it's here nor there. I mean, if there's a huge capital gain rate, I guess you really have to decide whether your portfolio manager is doing a good or bad job. So if he's got a pretty significant capital gain rates, then he's probably harvested those gains, and hopefully your share price reflects that. He's made some good decisions for you. He or she. Similarly, if there is hardly any of a capital gain distribution, it's hard to say, you know, what the reason is. Maybe he's just held on to everything. So, you know, that distribution in and of itself, let's just say it's a buck distribution. It'll also be broken out. I mean, it'll typically be like, I don't know, let's just say 25% capital gain, 75% ordinary income. So, I mean, dividends, and that gets taxed as ordinary income. So it just really just depends. And again, when you get your 1099, that'll be all broken out for you. You can, again, find out ahead of time. So you can just plan accordingly as well. And then, of course, like I said, the tax rates do change, you know, every now and then. Usually 15% is typically what they've been for forever and a day. But again, they're always changing that. So I don't know. Beside the point. So I guess that's pretty much it in terms of that. Because again, hearing that, when you hear X date, now that you know, especially as it applies to your mutual fund, you just have an awareness. I don't think again, there's an significant thing you should do. If you have a significant portfolio and you really don't want to pay taxes on that distribution, you could make a charitable contribution. And then you can take a tax write-off that way. And then the charity, they don't pay taxes on that. So, you know, I guess that's a win-win that way. But that just really depends. You want to do some competent tax planning, you know, with your tax advisor. So seek competent tax advice or work with your financial advisor to determine if that's a good strategy or not for you. So I'm going to leave it there. Hopefully you're having a great day and I will talk to you Later.