Information to help you meet the federal and state tax requirements specific to your Homestead Funds investments
If your money is in an individual retirement account (IRA), your account earnings are tax-deferred or tax-free, depending on the type of IRA you have. That means you will not have to pay any tax until you make a withdrawal from the account.
If you have a Traditional or Rollover IRA and took money out of that account: You will owe income tax on the amount you withdrew, called a “distribution,” unless you funded your IRA with non-tax-deductible contributions — in which case only the earnings are taxable. If you had not reached 59 ½ (the qualified retirement age as defined by the government) when you made the withdrawal, you may possibly face a 10% tax penalty on the amount withdrawn.
Common exemptions from the 10% early withdrawal penalty include: disability, the first-time purchase of a home ($10,000 lifetime maximum), a beneficiary distribution due to death, unreimbursed medical expenses exceeding 10% of your adjusted gross income, taking a series of substantially equal distributions, qualified education expenses, IRS levy or a call to duty of a military reservist.
If you have a Roth IRA and took money out of your account: Your contributions always come out first with no tax or penalty. You can withdraw your earnings without owing taxes or penalties if your account is open for at least five years and at least one of the following scenarios applies: You are age 59 ½ or older, permanently disabled, a beneficiary taking a distribution due to death, using the money for a first-time home purchase ($10,000 lifetime maximum). If you don’t meet these requirements, then your earnings will be subject to income tax and potentially a 10% tax penalty.
Common exemptions from the 10% early withdrawal penalty include a series of substantially equal distributions, unreimbursed medical expenses exceeding 10% of your adjusted gross income, medical insurance premiums paid after losing your job, an IRS levy, a qualified disaster recovery, qualified education expenses, qualified reservist distributions, or the cost of childbirth or adoption expenses up to $5,000.
If you are retired and have a Traditional or Rollover IRA: You should be aware that the government requires you to start taking money from your IRA soon after you reach age 72. Homestead Funds will send you a reminder when it’s time to start taking these Required Minimum Distribution payments. Roth IRAs are not subject to Required Minimum Distribution payments. Please see Helpful Tips: Taking Your Required Minimum Distribution for more information.
If your money is in a regular taxable account, you’ll owe tax on the amount of money your fund investment earned for you. A fund’s earnings are distributed to shareholders in the form of income or capital gains, which are either paid to you in cash or automatically reinvested in your account. Your share of any Homestead Funds earnings distributions will be reported to you on Form 1099-DIV, sent to you in January.
If you sold shares or exchanged shares from one fund to another, you’ll need to determine if your transaction resulted in a capital gain or loss and the amount of any tax due. To calculate this, you’ll need to know the cost of the shares that you sold, called your “basis,” as well as the sale price and your holding period. Your year-end account statements include purchase and sale prices for all of your fund transactions in any given year. Once you have your statements in hand, you can refer to IRS Publication 564, Mutual Fund Distributions, or consult with your tax professional to calculate your cost basis and determine any tax due.
Homestead Funds does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.