Leveling the Playing Field for Mutual Fund Investors

Key Takeaways

• Mutual funds are a cornerstone of household investing, with more than 70 million American households relying on them to save for retirement, education, and other long-term goals.
• Under current law, mutual fund investors must pay capital gains taxes on dividends in the year they are distributed—even when those dividends are automatically reinvested and never received in cash.
• The bipartisan Generating Retirement Ownership Through Long-Term Holding (GROWTH) Act would defer taxation on automatically reinvested mutual fund dividends until an investor sells their fund shares.
• This commonsense reform would promote savings, enhance product neutrality in the tax code, and put mutual fund investors on a level playing field with investors in other products.

Background

Mutual funds have long played a central role in helping American families build financial security. Whether saving for retirement, a home, or a child’s education, millions of households rely on mutual funds as a diversified, professionally managed investment option.

Today, over 70 million American households invest in mutual funds, and nearly two-thirds of households that own them have incomes below $150,000 per year.  More than 21 million U.S. households held long-term mutual funds in taxable accounts in 2024, and more than half of seniors who invest in mutual funds hold at least some of those investments in taxable accounts.  Mutual funds also account for more than 17% of U.S. household liquid financial assets—underscoring their importance to everyday investors.

The Current Tax Mismatch

Despite their widespread use, the tax code does not treat mutual fund investors in a product-neutral way. Due to long-standing tax rules, mutual funds generally must distribute net long-term capital gains to shareholders at least annually. Those distributions are subject to capital gains tax in the year they are made – even when, as is overwhelmingly the case, investors automatically reinvest those dividends back into the fund.

In fact, across the industry, 95% of capital gains distributions are reinvested. Yet investors may still receive a year-end tax bill on gains they never actually received in cash.

This treatment creates tax inefficiencies and can discourage long-term saving. Reinvested dividends do not generate usable income or provide liquidity to investors – they remain invested to help grow savings over time. Taxing those reinvested gains as if they were distributed and spent undermines that long-term objective.

A Bipartisan, Commonsense Solution

The GROWTH Act (H.R. 2089 / S. 1839), introduced on a bipartisan basis, would address this mismatch by ensuring that automatically reinvested mutual fund dividends are not taxed until the investor sells their fund shares.

This reform would:

• Strengthen household finances by allowing investors to keep more of their savings invested.
• Support long-term capital formation in U.S. markets.
• Ensure a level playing field between mutual funds and other financial products—such as individual stocks, bonds, and ETFs—where reinvested gains are not taxed annually.

The proposal is also consistent with existing areas of the tax code that allow deferral when proceeds are reinvested, reflecting a broader policy recognition that reinvestment does not create realized income in a meaningful sense.

Promoting Savings and Market Participation

At a time when policymakers are focused on expanding access to long-term investing and strengthening retirement readiness, tax policy should encourage – not inadvertently penalize – disciplined saving.

Mutual funds play an important role in price discovery, capital allocation, and corporate governance. They are also one of the most widely held investment vehicles in the country. Ensuring that the tax code does not disadvantage mutual fund investors relative to other products is an important step toward maintaining broad participation in U.S. capital markets.

The GROWTH Act offers a targeted, bipartisan solution that promotes fairness, enhances tax neutrality, and supports long-term investment.

Congress should act to pass the GROWTH Act and help millions of American households continue building financial security through disciplined, long-term saving.