reinvesting dividends and Vanguard cost basis choice

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reinvesting dividends and Vanguard cost basis choice

Postby linuxuser » Mon Jan 28, 2013 6:18 pm

I currently have Vanguard Total Stock Market Index and Vanguard Total International Stock Index in the taxable portion of my portfolio.
They are both currently set up to re-invest capital gain distributions.

Should I have those capital gain distrubtions go into another account?

In the past when I sold or exchanged funds it was in totality, but it is likely I will be selling portions of these funds in early retirement for expenses.

Now with the IRS requirement that the cost basis be reported, would this make things easier? I am confused by what to do.
Last edited by linuxuser on Mon Jan 28, 2013 6:35 pm, edited 1 time in total.
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Re: reinvesting dividends and Vanguard cost basis choice

Postby dbr » Mon Jan 28, 2013 6:33 pm

I think it is much simpler for a person selling funds for income to not reinvest distributions. In fact I prefer that even when accumulating because it allows a little cash to redirect for rebalancing.
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Re: reinvesting dividends and Vanguard cost basis choice

Postby sscritic » Mon Jan 28, 2013 6:33 pm

linuxuser wrote:Now with the IRA requirement that the cost basis be reported,

I have been selling for more than 40 years. The IRS requirement (who knows what the Irish Republican Army requires) to report my basis on Schedule D has been there the whole time. Basis reporting is not new.

Here are the 1040 instructions from 1979. The instructions for Schedule D start on page 19. Instructions for column e, Cost or Other Basis, as Adjusted start at the bottom of the right hand column of page 20.
http://www.irs.gov/pub/irs-prior/i1040--1979.pdf
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Re: reinvesting dividends and Vanguard cost basis choice

Postby linuxuser » Mon Jan 28, 2013 6:39 pm

dbr wrote:I think it is much simpler for a person selling funds for income to not reinvest distributions. In fact I prefer that even when accumulating because it allows a little cash to redirect for rebalancing.

I am thinking it would be easier mathwise not to have to deal with the new money being added every year.

Do you reinvest the distrubtions in an identical fund or a money market fund?
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Re: reinvesting dividends and Vanguard cost basis choice

Postby dbr » Mon Jan 28, 2013 6:44 pm

linuxuser wrote:
dbr wrote:I think it is much simpler for a person selling funds for income to not reinvest distributions. In fact I prefer that even when accumulating because it allows a little cash to redirect for rebalancing.

I am thinking it would be easier mathwise not to have to deal with the new money being added every year.

Do you reinvest the distrubtions in an identical fund or a money market fund?


I use a broker and all distributions go to a sweep account in the brokerage.

Assuming I want to spend the money, which is the case right now, I just transfer the cash to my checking account whenever anything turns up. It is probably even possible for some brokers to deposit directly into an outside bank account, but I haven't bothered to find out.
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Re: reinvesting dividends and Vanguard cost basis choice

Postby House Blend » Mon Jan 28, 2013 7:10 pm

linuxuser,

FWIW, I have total international and total stock in my taxable account.

For those two funds, I use Specific ID. Makes it easier to do tax loss harvesting. And for that reason, I accept that I will occasionally [i.e., for years at a time] need to own two similar but not identical total international funds, and/or two similar but not identical total stock funds. (But not today. At the moment I just have two funds instead of four.)

And in my view, fewer lots == simpler (YMMV), so I don't reinvest. Instead, I have dividends sent to my checking account. Those dividends + any new money are combined into a single purchase of whichever fund is underweight at that time.

BTW: in your OP, you mention capital gains distributions. Those are extremely rare for TSM and TISM, so I don't think it matters what you select. Dividend distributions OTOH are certain to happen.
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Re: reinvesting dividends and Vanguard cost basis choice

Postby linuxuser » Mon Jan 28, 2013 9:09 pm

House Blend,

I am not retired yet but strongly considering it.

I don't need the distributions now but will when I early retire.

So, it sounds like I should stop reinvesting and send the dividends to my checking account?
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Re: reinvesting dividends and Vanguard cost basis choice

Postby Toons » Mon Jan 28, 2013 9:37 pm

linuxuser wrote:House Blend,

I am not retired yet but strongly considering it.

I don't need the distributions now but will when I early retire.

So, it sounds like I should stop reinvesting and send the dividends to my checking account?


I have been reinvesting dividends and cap gains for many years in taxable accounts.Recently I have had and will continue to have those distributions sent to my checking account for living expenses as I retired about 2 years ago.
Regarding reinvesting and taxes in taxable account. I have always used average cost basis(maybe not the most efficient for minimizing taxes).Vanguard includes cap gains and dividends that were reinvested when calculating cost basis if I sell any shares.Taxes ,no problem :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Re: reinvesting dividends and Vanguard cost basis choice

Postby House Blend » Mon Jan 28, 2013 10:14 pm

linuxuser wrote:House Blend,

I am not retired yet but strongly considering it.

I don't need the distributions now but will when I early retire.

So, it sounds like I should stop reinvesting and send the dividends to my checking account?


I don't think there's only one right answer. But as noted, sending dividends to a MMF or bank account gives an accumulator more chances to rebalance with no added costs. And creates fewer wash sale obstacles.

For a retiree, dividends are taxed regardless of what you do with them. So you might as well spend that money first before tapping tax-advantaged accounts or selling taxable shares. So it also makes sense for retirees to direct dividends to a bank account.

(In tax-advantaged accounts I would reinvest.)
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Re: reinvesting dividends and Vanguard cost basis choice

Postby linuxuser » Mon Jan 28, 2013 10:17 pm

Toons and House Blend,

Thank you both.
This is what I love about the Bogleheads forum.
Lots of people of similar mindset with lots of experience.
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Re: reinvesting dividends and Vanguard cost basis choice

Postby Toons » Mon Jan 28, 2013 10:19 pm

linuxuser wrote:Toons and House Blend,

Thank you both.
This is what I love about the Bogleheads forum.
Lots of people of similar mindset with lots of experience.


:sharebeer
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
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Re: reinvesting dividends and Vanguard cost basis choice

Postby tuckeverlasting » Tue Jan 29, 2013 8:20 pm

Yes, thank you all for this thread! Very helpful, like so many wonderful BH threads. :D
It's Good To Be A Boglehead.
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