Taxable -Tax Exempt Fund - Reinvest Divident or not

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Taxable -Tax Exempt Fund - Reinvest Divident or not

Postby FB01 » Mon Dec 31, 2012 4:14 pm

Hi,

Normally we do not reinvest dividend in taxable to avoid tax complication. However, I am now putting my savings in the below two Funds in taxable and am reinvesting dividend. Is that good or not?

VMLTX - Vanguard Limited Term Tax Exempt
VWITX - Vanguard Intermediate Term Tax Exempt

Can anyone give their opinion

Thanks,
FB
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Re: Taxable -Tax Exempt Fund - Reinvest Divident or not

Postby livesoft » Mon Dec 31, 2012 4:21 pm

My opinion is that is it neither good nor bad. If you can do math, then you can calculate basis when you sell. If you cannot do math, then your broker can calculate basis when you sell.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Taxable -Tax Exempt Fund - Reinvest Divident or not

Postby dbr » Mon Dec 31, 2012 4:22 pm

The tax complication is keeping track of capital gains. You still have to report capital gains on sales of tax exempt bond funds, so it is still just as much a complication or not as for any investment
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Re: Taxable -Tax Exempt Fund - Reinvest Divident or not

Postby abuss368 » Mon Dec 31, 2012 4:26 pm

If the funds are held directly with Vanguard - Vanguard keeps track of all cost basis information and provides reports at year end.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + REITs
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Re: Taxable -Tax Exempt Fund - Reinvest Divident or not

Postby FB01 » Mon Dec 31, 2012 4:44 pm

abuss368 wrote:If the funds are held directly with Vanguard - Vanguard keeps track of all cost basis information and provides reports at year end.



Yes. The funds are directly held with Vanguard. So that means, I should be fine if I reinvest the divident for these funds in Taxable?

Apart from Tax complications (which should be taken care by Vanguard), there is no disadvantage in reinvesting the dividends..right?

Thanks,
FB
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Re: Taxable -Tax Exempt Fund - Reinvest Divident or not

Postby kayo » Mon Dec 31, 2012 5:20 pm

FB01 wrote:
abuss368 wrote:If the funds are held directly with Vanguard - Vanguard keeps track of all cost basis information and provides reports at year end.



Yes. The funds are directly held with Vanguard. So that means, I should be fine if I reinvest the divident for these funds in Taxable?

Apart from Tax complications (which should be taken care by Vanguard), there is no disadvantage in reinvesting the dividends..right?

Thanks,
FB

There is no right or wrong answer.

My personal preference in taxable space is to have all the distributions roll into my money market fund. Once the new year arrives and I have paid my taxes and I have set aside money for IRA contributions or I Bond purchases or whatever, I then invest the remaining money in shares of whatever fund(s) get me closer to the asset allocation in my IPS. This results in fewer lots to be tracked to compute capital gains/losses when selling sometime in the future.

In tax advantaged space I set up all distributions to automatically reinvest.

I do it this way because *to me* it feels like less work and less transactions to manage and so forth. Also those funds sitting in the money market account serve as some extra padding to my emergency reserves, just in case I suddenly need to buy a car or a furnace or whatever.

Happy new year!
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Re: Taxable -Tax Exempt Fund - Reinvest Divident or not

Postby grabiner » Mon Dec 31, 2012 8:12 pm

There is a slight tax advantage for not reinvesting dividends in a tax-exempt fund. If you sell shares you have held less than six months, you must reduce any capital loss by the amount of tax-exempt dividends paid by those shares. Thus, if you reinvest $6000 in dividends at $10 per share over six months, receive $50 in tax-exempt interest on those shares, and then interest rates rise and you sell the shares at $9.80 per share for $5880 after interest rates rise, your deductible capital loss will be $70 rather than $120. If interest rates fall and you sell the shares at $10.20 for $6120, you still pay tax on the $120 capital gain.

If you use average-cost or FIFO accounting (which doesn't cost that much for a bond fund compared to specific ID), you will only sell shares reinvested in the last six months if you sell all or almost all of your shares.
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Re: Taxable -Tax Exempt Fund - Reinvest Divident or not

Postby Pam01 » Mon Dec 31, 2012 8:30 pm

grabiner wrote:If you use average-cost or FIFO accounting (which doesn't cost that much for a bond fund compared to specific ID), you will only sell shares reinvested in the last six months if you sell all or almost all of your shares.


Can you expand on this a little? Let's assume that I purchased 100 shares each month in this tax-exempt fund for last 12 months and reinvested dividends monthly. If I wanted to sell 600 shares after 1 year (from a total of more than 1200 shares), will I still fall prey to six month rule if average cost (rather than FIFO) is employed as cost basis?
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Re: Taxable -Tax Exempt Fund - Reinvest Divident or not

Postby grabiner » Mon Dec 31, 2012 9:30 pm

Pam01 wrote:
grabiner wrote:If you use average-cost or FIFO accounting (which doesn't cost that much for a bond fund compared to specific ID), you will only sell shares reinvested in the last six months if you sell all or almost all of your shares.


Can you expand on this a little? Let's assume that I purchased 100 shares each month in this tax-exempt fund for last 12 months and reinvested dividends monthly. If I wanted to sell 600 shares after 1 year (from a total of more than 1200 shares), will I still fall prey to six month rule if average cost (rather than FIFO) is employed as cost basis?


Average-cost accounting sells shares in FIFO order, but averages the basis of all the shares. Thus, if you had 600 shares which you had bought more than six months ago, the six-month rule would not apply to those shares, and the gain or loss on the first 100 shares would be long-term if it has been more then a year.
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Re: Taxable -Tax Exempt Fund - Reinvest Divident or not

Postby Pam01 » Mon Dec 31, 2012 11:02 pm

Thanks for the clarification David.
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Re: Taxable -Tax Exempt Fund - Reinvest Divident or not

Postby BHCadet » Mon Dec 31, 2012 11:30 pm

I'm same as you, in my taxable account, distributions are used for rebalancing buying the asset class that is under allocated.
However, distributions from my Vanguard CA IT Tax-Exempt Admiral (VCADX) fund are automatically reinvested.
Putting VCADX in auto-pilot gives me one less thing to manage.
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