Tax terms

Automatic reinvestment – A service offered by most mutual funds whereby income and capital gain distributions are automatically invested into the fund by buying additional shares and thus building up holdings through the effects of compounding.

Conversion – A rollover or transfer of assets from a Traditional IRA, SIMPLE IRA, or a SEP IRA to a Roth IRA.

Distribution – The sale of mutual fund shares and payment of such proceeds to the participant or his/her beneficiaries for a tax-qualified account.

Dividend – A distribution of cash from a fund's net income to its shareowners. Dividends can be reinvested to purchase additional shares in a mutual fund account.

Excess contribution – The amount of money contributed to a tax-qualified account that exceeds the maximum allowable amount. This amount, if left in the tax-qualified account, may be subject to a penalty tax.

Exchange – The sale of shares in one fund and subsequent purchase of shares in another fund.

Fair market value – The account value as of the last business of the year. This is calculated by multiplying the number of shares by the net asset value.

Income Distribution – A distribution of cash from a fund's net investment income to its shareowners. Income distributions can be reinvested to purchase additional shares in a mutual fund account.

Mutual Fund – An investment that pools the money of numerous investors who have similar investment goals and invests that money in a number of securities on their behalf.

Net Asset Value (NAV) – The current price of a share. It is calculated daily by taking the fund's total assets less liabilities and dividing the remainder by the number of outstanding shares.

Qualified retirement plan – A retirement plan that meets the requirements of the Internal Revenue Code and related regulations and is, therefore, eligible for special tax consideration. Contributions to such a plan are generally tax-deductible for the employer. Earnings on such contributions are tax deferred until withdrawn.

Realized vs. unrealized capital gain (loss) – A capital gain (or loss) is realized once the shareowner redeems or exchanges shares from his/her account for more (or less) than the purchase price. Unrealized gains ( or losses) reflect changes in the value of the unredeemed shares in the account.

Recharacterization – The method by which a taxpayer may elect to change the nature of an IRA contribution (e.g., from a Roth IRA to a Traditional IRA, and vice versa). Recharacterization allows a taxpayer who converted an amount from a Traditional IRA to a Roth IRA to undo that transaction.

Redemption – The sale of mutual fund shares.

Reinvested dividends – Income and capital gains distributions that are reinvested by the shareowner to purchase additional shares in a mutual fund. These dividends are fully taxable and become part of the cost basis of your account.

Short-term vs. long-term capital gain (loss) – A short-term capital gain (or loss) is realized if the investment was owned for one year or less. A long-term capital gain (or loss) is realized if the investment was owned for more than one year.

Wash sale – Occurs when shares are sold at a loss and within 30 days before or after the sale you buy (direct purchase or exchange purchase) substantially identical property. The loss is disallowed on a wash sale.

This information is intended to serve as a reference tool to assist you with filing your federal and state tax returns, but it is not intended to serve as legal or tax advice. For any specific tax questions, you should contact the IRS at 1-800-829-1040, visit their website at www.irs.gov or consult your professional tax advisor.

State Farm VP Management Corp Risk/Important Disclosures. State Farm Mutual Funds Prospectus. The State Farm College Savings Plan Enrollment Handbook (PDF 260 KB) .

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AP2007/12/9753